ITAT Kolkata: Educational Income is Exempt from Tax Under Section 10 (23C)(vi)

The Kolkata bench of the Income Tax Appellate Tribunal (ITAT) has noted that income derived from educational activities is eligible for exemption under section 10(23C)(vi) of the IT (Income Tax) Act, 1961.

The Durgapur Society of Management Science, a registered educational entity under Section 10(23C)(vi) of the Act, underwent scrutiny for the Assessment Year 2018-19 after submitting an e-return indicating zero income.

The case was flagged for investigation regarding trust receipts and refund claims. Notices under sections 142(1) and 143(2) of the Income Tax Act, 1961, were issued, and the Assessing Officer’s findings raised concerns.

Upon a subsequent review of records by the Commissioner of Income Tax (Exemption), it was revealed that gross receipts amounted to Rs. 3,97,86,090, with building rent exceeding 50%. As a result, a show cause notice under Section 263 of the Income Tax Act, 1961, was issued on 13/02/2023.

In defence, the counsel for the assessee, Sunil Surana, argued that the unused section of the building was leased to generate income, which was then utilized for charitable endeavours. Emphasizing that the institution’s primary purpose was educational and not profit-driven, the counsel cited legal precedents supporting such cases.

Abhijit Kundu, representing the revenue and seeking exemption under Section 10(23C)(vi) of the Income Tax Act, 1961, insisted on strict adherence, particularly focusing on profits derived exclusively from educational activities.

The argument underscored the necessity of excluding profits generated for purposes other than education, as stipulated in sub-clause (iiiab) of section 10(23C) of the Income Tax Act, 1961, rather than encompassing income from building rent.

The two-member tribunal bench, consisting of Sanjay Kumar (Judicial member) and Dr Manish Board (Account member), concluded that the challenge lay in contesting the revisionary order issued by the Commissioner of Income Tax (Exemption) under Section 263 of the Income Tax Act, 1961.

The Durgapur Society of Management Science, primarily involved in educational activities, underwent scrutiny as its gross receipts for the year amounted to Rs. 3,97,86,089, with building rent surpassing 50% at Rs. 2,02,34,592.

Significantly, there was a lack of separate accounting for rental income and expenses. The CIT (E) pointed out that rental income not originating from educational activities did not qualify for exemption under Section 10(23C)(vi) of the Income Tax Act, 1961. The CIT (E) considered the Assessing Officer’s failure to examine this as both erroneous and detrimental to the revenue’s interests.

Consequently, the contested order under Section 263 of the Income Tax Act, 1961, issued by the CIT (E), was annulled, and the Assessing Officer’s order under Section 143(3) of the Income Tax Act, 1961, dated 03/02/2021, was reinstated.