SC order puts 'charity' in charitable education institutes back in focus

Possible loss of tax exemption for educational institutions that are making profits puts the question of charity back in focus

Educational institutions are apprehensive of the recent Supreme Court ruling that could take away the income tax exemption if these entities are making profits and run for such a purpose. Many such institutions feel that the decision would hurt the sector and impact the growth prospects of educational institutions in the country.

Most educational institutions in India are formed as charitable trusts, even though the option for going through the corporate route exists. According to the Association of Indian Management Schools (AIMS), around 60 per cent of the institutions come under charitable trusts and another 40 per cent are registered under the Societies Act.

On October 19, the Supreme Court said that if educational institutions are making profits and run for such an expressed purpose, then the benefit under Section 10(23C) of the Income-Tax Act will not be extended to such institutions. The said Section provides that the income earned by any university or educational institution existing solely for educational purposes, and not for purposes of profit, shall be exempt from tax.

A three-judge bench of the Supreme Court said, “It is held that the requirement of the charitable institution, society or trust 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.”

Legal experts said that the ruling means that the institutes have to provide services at or marginally above their cost. “Educational institutions would have to work out how they will build a corpus for their long-term costs, such as building a research facility or a new building,” said Dinesh Kanabar, founder and CEO of Dhruva Advisors.

“Such a ruling is going to hurt the sector and its future growth of educational institutions. Most of the institutions were doing extremely well under this category. It is going to affect their finances,” said Ramaswamy Nandagopal, president, AIMS.

Many are also viewing the SC order in the larger context of charitable organisations. “At least for us, the order is in conjunction with existing acts for private trusts, which apply for us as a private university in Gujarat. I don’t see any deviation from existing norms,” said Ritesh Hada, president, Karnavati University, one of the leading private universities in Ahmedabad.

Hada said that according to the law, if within a certain period funds are not deployed for the growth of the trust, which in the present case is related to education, then the institute would not be eligible for income tax exemption. “There will always be a surplus, which needs to be ploughed back since a university is a capital-intensive operation.”

Several educational trusts also indicated that their not-for-profit motive cannot be questioned. “Growth of the nation depends on the growth of the higher education sector. More than 70 per cent of higher education institutions are managed by the private sector. Private sector plays a very pivotal role in enhancing the quality of higher education in our country,” said Aloysius Edward, dean, faculty of commerce and management at Kristu Jayanti College in Bengaluru, managed by the Bodhi Niketan Trust.

Educational institutions running as not-for-profit have endorsed the apex court order. Indian Institute of Management Indore, for instance, said that its entire surplus goes into building the institution.

Ahmedabad-based Nirma University, which functions under the Nirma Education and Research Foundation, also said it was not affected by the SC order as it is a not-for-profit institution. Anup Singh, director general, Nirma University, said, “Providing education is an individual right in India. However, it has to be a charitable service. Hence, education must be for non-profit purposes. The Supreme Court of India has told it time and again.”

According to industry sources, the overall education sector in India is estimated to be over $130 billion, growing at a compound annual growth rate of nearly 14 per cent. Under the University Grants Commission, there are 456 state universities, 126 deemed to be universities, 54 central universities and 421 private universities.