The Hindu Business Line : Unaided, uncharitable and unsettled

EDUCATION has been commercialised; schools are run as business enterprises. This is the constant refrain of middle class parents who send their children to some of the better-known English-medium schools.

These institutions do not exclude the profit motive. Enormous fees are charged. They can escape income-tax if they are affiliated to any government board, or if they are partly aided by government institutions which support formal education, by claiming exemption under Section 10(22) of the Income-Tax Act, 1961.

The Section, which exempts the income of the educational institutions existing solely for educational purposes and not for purposes of profit, was omitted with effect from April 1, 1999, only to reappear as Section 10 (23C)(iiiab).

What is the status of educational institutions which are not recognised? This question was answered by the Gujarat High Court in a leading case recently.

The Saurashtra Education case

The Saurashtra Education Foundation was a registered public charitable trust formed with a view to run bal mandirs, kindergarten schools, libraries and other institutions imparting education, including B.Ed, Ph.D, and so on. It sponsored programmes for rural development and improvement of rural technology. It took classes for students of Standards X to XII and for those appearing for CA entrance exams. It also conducted lecture programmes and audiovisual shows.

The Foundation was given the benefit of exemption as a charitable trust under Section 11(1)(a) but was denied the benefit of Section 10(22) on the ground that the term `education' in the said section referred only to formal education and not to other forms meant for development and betterment of education.

As the Tribunal decided the matter in favour of the Revenue, the case went up to the Gujarat High Court.

The Foundation argued that `education' must be given the same meaning both in Sections 11(1)(a) and 10(22) and cited the example of the Institute of Chartered Accountants of India (ICAI) and also the case of Open University which imparted education without geographical proximity to the students.

The Nascitur a Socii rule

The High Court pointed out that Section 10(22) exempted income of a university or other educational institution. It applied the rule of Nascitur a Socii (a word is known by the company it keeps).

The term `educational institution' would take colour from the preceding word `university'. Therefore, only an institution imparting formal education in an organised and systematic manner will be covered by Section 10(22). The institution should be accountable to some authority and there should be teachers and the taught. The institution must have some degree of control over the taught. The High Court observed:

"An institution may be carrying on educational activities as are being carried on by the assessee herein without imparting formal education and without being affiliated to or accountable to any authority. Such a trust can certainly be considered as qualifying for exemption under Section 11(1)(a) read with Section 2(15), but the term `the educational institution' contemplated by Section 10(22) is a narrower concept.

"Though `educational institution' and the educational activities are closely interconnected; in Section 11(1)(a) read with Section 2(15) it is the activities which are in focus, whereas in Section 10(22) both the institution and the activities are in focus.

"An educational institution under Section 10(22) is, therefore, more than a body carrying on charitable activities in the field of education as contemplated by Section 2(15)."

The Foundation did not conduct any courses in formal education but was carrying on activities connected with such formal education. It was not affiliated to or registered by any authority. It had no control over its trainees.

The ICAI is governed by a charter and it has disciplinary control over the students. The test of systematic instructions for trainees cannot be ignored. The High Court rejected the claim for exemption of the Foundation under Section 10(22).

There are contrary rulings on this issue. There are decisions holding that it is not necessary for an educational institution to be affiliated to any university or board for claiming exemption under Section 10(22) (CIT vs Doon Foundation — 154 ITR 208 Calcutta; Additional CIT vs Aditanar Educational Institution — 118 ITR 235 Madras; and CIT vs Accadamy for General Education — 150 ITR 135 Karnataka). These authorities were not cited before the Gujarat High Court.

However, at the end of the judgment, the Gujarat High Court observed: "Having regard to the emerging trends and the modern means of teaching and the growing importance of the institutions other than those engaged in formal teaching, this is a fit case for appeal to the Hon'ble Supreme Court. We certify accordingly."

The Gujarat ruling has brought into focus controversy surrounding the claim for tax exemption by unaided educational institutions which thrive by fleecing parents.

(The author is a former Chief Commissioner of Income-tax)

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