Surplus generation for school development is not profit motive; Exemption u/s 10(23C)(vi) allowed

Case I: Surplus Generation & Asset Creation

Issue

Whether the continuous generation of surplus by an educational society and the utilization of such surplus to create assets can be a valid ground to reject exemption under Section 10(23C)(vi) by labeling it as “profit motive.”

Facts

Assessee’s Activity: The society was solely engaged in running an educational institution.
Application Rejected: The Commissioner (Exemptions) rejected the application for exemption under Section 10(23C)(vi).
Reasoning: The rejection was based on the observation that the assessee was generating surplus year after year, which the Commissioner interpreted as a commercial/profit-oriented approach.

Decision

Educational Purpose: The Court noted that the assessee was solely engaged in educational activities. Carrying out such activities inherently requires creating assets (infrastructure, labs, libraries).
Source of Assets: The Court held that assets need not always be acquired through corpus funds or external donations. They can validly be acquired using the own surplus generated by the society in the course of providing education.
Surplus is Natural: The mere generation of surplus in a given year or a set of years does not automatically imply a profit motive. As long as the surplus is incidental to the educational activity and ploughed back into it, the exemption cannot be denied.
Held: In favour of the assessee.

Case II: Transfer to Development Fund

Issue

Whether transferring a substantial amount of surplus to a “School Development Fund” indicates a profit motive, or if it is a legitimate method of utilizing funds for educational purposes.

Facts

Fund Transfer: The assessee transferred significant amounts of its annual surplus to a ‘School Development Fund’.
Commissioner’s Objection: The Commissioner (Exemptions) viewed this accumulation as evidence that funds were being generated without being used for the immediate purpose of the society, thereby denying registration.

Decision

Intent of Accumulation: The Court held that surplus itself is not indicative of profit motive. The assessee asserted that the fund was intended solely for the development and expansion of the school and improvement of infrastructure/facilities.
Utilization for Object: Since the acquisition of assets in the name of the society was established, and those assets had a clear use for the educational object of the society, the allegation of non-utilization was unsustainable.
Legitimacy: Creating a development fund for future expansion is a prudent educational activity, not a commercial hoarding of wealth.
Held: In favour of the assessee.

Key Takeaways

Surplus is Not Profit: In the context of Section 10(23C), “Profit” means private gain. “Surplus” used for the institution’s growth is permissible. Educational institutions are allowed to generate reasonable surplus to modernize and expand.

Internal Accruals: Assets can be funded through internal surplus. There is no requirement that infrastructure must only be built using donations.

Development Funds: Transferring money to a designated Development Fund is a valid application of income, provided the fund is eventually used for the educational objects (infrastructure, facilities, etc.).

IN THE ITAT DELHI BENCH ‘A’

Vaish Model Primary School Education Society

AO (Exemption)

ANUBHAV SHARMA, Judicial Member
and S. Rifaur Rahman, Accountant Member

IT Appeal No. 3325 (Del) OF 2024
[Assessment year 2009-10]

NOVEMBER 12, 2025

Mohit Bassi, Adv. for the Appellant. Jitender Singh, CIT-DR for the Respondent.

ORDER

Anubhav Sharma, Judicial Member. – This is an appeal preferred by the Assessee against the order dated 16.05.2024 of the Commissioner of Income-tax (Exemptions), Chandigarh [hereinafter referred to as the ‘Ld. CIT(E)’, for short], rejecting the application of the assessee for exemption/approval u/s 10(23C)(vi) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’).

2. Head and perused the records. That the appellant/assessee is an educational institution/society situated in Bhiwani in the State of Haryana. The primary aim and object of the Society is to provide sound education at all levels. The Society is managed and controlled by the Managing Committee of the Society/Institution. Vaish Mahavidyalaya Trust, Bhiwani, being the parent body of the Society/Institution, shall exercise supervisory powers and provide necessary guidance to the Society through the Managing Committee as and when required. The claim of assessee is that all income, earnings, and properties, whether movable or immovable, is devoted entirely for advancing the aims and objectives outlined in this Memorandum of Association i.e solely for purpose of advancement of the education.

3. A chronology of events in the present appeal are necessary and the same are narrated below:-

Dates

Events

26.09.2009

Assessee filed an application for grant of exemption under Section 10(23C)(vi) of the Income Tax Act, 1961 for Assessment Year 2009-10 onwards. [Pg.l5 of Paper Book]

29.09.2010

The said Application was rejected by CCIT, Panchkula on following grounds:

– Asseessee society transferred the substantial amount of actual surplus to school development fund.

– Assessee society is generating surplus year after year.

Therefore, Assessee failed to satisfy basic condition of existing solely for education and not for profit as per section 10(23C)(

) of the Act.

03.10.2011

Assessee approached Hon’ble P&H High Court vide CWP No.4119 of 2011 challenging the rejection order dated 29.09.2010. Hon’ble High Court vide order 03.10.2011 allowed the writ petition and quashed the impugned order rejecting the application for exemption U/s 10(23C)(vi) and directed the CCIT, Panchkula to re-decide the matter in view the principles laid down in Pinegrove International Charitable Trust case.

28.05.2012

In view of the directions of Hon’ble High Court, the case was re- fixed for hearing by CCIT, Panchkula. However, CCIT, CCIT Panchkula again rejected the said application dated 26.09.2009 on following ground: –

Discrepancy in the maintenance of accounts and incurring of expenditure relating to purchase and consumption of diesel and examination fees, which is not fully & exclusively for the purpose of education

28.09.2018

The assessee (2^nd time), approached Hob’ble Punjab and Haryana High Court vide CWP No. 16541 of 2012 challenging the rejection order dated 28.05.2012. The Hon’ble High Court vide order dated 28.09.2018 again set aside the order of rejection dated 28.05.2012 directing the respondent to decide the matter afresh in accordance with law. [Pg.42-Pg.45 of Paper Book]

19.09.2020

The assessee filed an application before the respondents to give effect to the judgment of Hon’ble Punjab and Haryana High Court in CWP No. 16541 of 2012.

18.08.2021

CIT(E), Chandigarh thereafter issued a questionnaire asking to furnish details of the information in respect to the exemption application. [Pg. 55- Pg. 57 of the Paper Book|

20.01.2022

The assessee replied to the questionnaire and uploaded all the documents as asked by the respondent.

23.04.2024

The assessee again filed an application reminding/requesting the CIT (E) to decide the application and submitted that the assess has submitted all the documents as asked in the questionnaire. [Pg. 46- Pg. 54 of the Paper Book]

16.05.2024

Ld. CIT(E) (after the delay of 6 years) again rejected the application for exemption U/s 10(23C)(vi) of the Act on the following ground:

(i)

The assessee has transferred the surplus amount to the School Development Fund.

(ii)

The applicant society is generating substantial surplus year after year.

Ld. CIT (E) has relied upon the judgment of the Hon’ble Supreme Court in the case of Union of India v. Baba Banda Singh Bahadur Education Trust (SC), wherein the Apex Court followed the law laid down in New Noble Educational Society v. CCIT & Anr. (SC) It is pertinent to mention that the Hon’ble Supreme Court, in New Noble Educational Society (supra), has specifically held that the law declared therein shall have prospective effect. Therefore, the said judgment has to be applied prospectively and thus cannot be applied in the present case.

4. Now admittedly assessee Society is Generating Substantial Surplus Every Year. The objects of the assessee society is solely to engage itself in education or educational activities. Engaging in educational activities certainly involves creating assets for carrying out such activities. The source of acquisition of such assets need not always by from the corpus or donations, but own surplus generated by the assessee society in course of providing education or educational activities. There is no bar under the Act to not generate surplus so generation of surplus in a given year or set of years per in course of providing education or education related activities cannot by itself be ground to reject application the application for exemption U/s 10(23C)(vi) of the Act on the ground that the applicant society is generating substantial surplus year after year. Hon’ble Supreme Court, in New Noble Educational Society v. Chief CIT /[2022] 448 ITR 594 (SC) has laid down following conclusions:

It is held that the requirement of the charitable institution, society or trust etc., to ‘solely’ engage itself in education or educational activities and not engage in any activity of profit, means that such institutions cannot have objects which are unrelated to education. In other words, all objects of the society, trust etc., must relate to imparting education or be in relation to educational activities.

Where the objective of the institution appears to be profit-oriented, such institutions would not be entitled to approval under section 10(23C) of the IT Act. At the same time, where surplus accrues in a given year or set of years per se, it is not a bar, provided such surplus is generated in the course of providing education or educational activities.

The seventh proviso to section 10(23C), as well as section 11(4A) refer to profits which may be ‘incidentally’ generated or earned by the charitable institution. In the present case, the same is applicable only to those institutions which impart education or are engaged in activities connected to education.

The reference to ‘business’ and ‘profits’ in the seventh proviso to Section 10(23C) and Section 11 (4A) merely means that the profits of business which is ‘incidental’ to educational activity – as explained in the earlier part of the judgment i.e., relating to education such as sale of text books, providing school bus facilities, hostel facilities, etc.

The reasoning and conclusions in American Hotel (supra) and Queen’s Education Society (supra) so far as they pertain to the interpretation of expression ‘solely’ are hereby disapproved. The judgments are accordingly overruled to that extent.

While considering applications for approval under section 10(23C), the Commissioner or the concerned authority as the case may be under the second proviso is not bound to examine only the objects of the institution. To ascertain the genuineness of the institution and the manner of its functioning, the Commissioner or other authority is free to call for the audited accounts or other such documents for recording satisfaction where the society, trust or institution genuinely seeks to achieve the objects which it professes. The observations made in American Hotel (supra) suggest that the Commissioner could not call for the records and that the examination of such accounts would be at the stage of assessment. Whilst that reasoning undoubtedly applies to newly set up charities, trusts etc. the proviso under section 10(23C) is not confined to newly set up trusts – it also applies to existing ones. The Commissioner or other authority is not in any manner constrained from examining accounts and other related documents to see the pattern of income and expenditure.

It is held that wherever registration of trust or charities is obligatory under state or local laws, the concerned trust, society, other institution, etc. seeking approval under section 10(23C) should also comply with provisions of such state laws. This would enable the Commissioner or concerned authority to ascertain the genuineness of the trust, society etc. This reasoning is reinforced by the recent insertion of another proviso of section 10(23C) with effect from 1-4-2021.

5. As with regard to the transfer of Surplus Amount to School Development Fund, we are of considered view that the said surplus is not by itself indicative of any profit motive when it is asserted that same is intended solely for utilization towards the development and expansion of school and improvement of school’s infrastructure and facilities. Thus question to be examined by ld. CIT(A) was if the said funds are applied exclusively towards achieving the objects of society, but that exercise seems to not been done.

6. We have gone through the material on record and the ld. AR has established that the funds were used in AY 2021-22 for purchase of certain lands in the name of the assessee society which have also been reflected in the balance sheet of the assessee. Thus acquisition of asset in the name of society and considering that the asset certainly has a possible use for the object of the Society then the allegation that the assessee is merely generating funds which are not being used for the purpose of the society are not sustainable and the same cannot be a ground to deny the registration when otherwise it is established from the Memorandum of Association and its expenditures that it is engaged in running educational institutions. Accordingly, the impugned order is set aside. The ld.CIT(E) is directed to pass appropriate orders in the light of the aforesaid observations. The appeal is allowed.