By way of two detailed decisions released on 19-10-2022, a three-Judge Bench of the Supreme Court of India has revisited the entire law governing income tax exemption for charitable activities in India. These decisions have examined the statutory provisions which have been in vogue for decades and highlighted the abrasions and incongruities which have “crept in” their understanding as also their judicial appreciation resulting into varying standards. Accordingly, to reconcile the deviations from the parliamentary intent the Supreme Court has virtually rewritten the jurisprudential construction of the entire law on the subject. This article attempts to sketch the salient features of these decisions.

Backgrounder to the decisions

While both the decisions relate to the interpretation of the law governing charitable institutions, the subject-matter of the decisions is different. The first decision is in New Noble Education Society v. CIT1 which deals with tax exemption to educational institutions, the relevant provisions being Sections 2(15) and 10(23-C) of the Income Tax Act, 1961. The occasion for this decision arose in view of the refusal of the income tax department denying the exemption to a trust. The fact that an educational institution was indeed being run by the trust was not in dispute. However, the two reasons for denying the exemption were; (a) the objectives of the trust were not limited to imparting education and, therefore, it could not be considered as “solely” instituted for purpose of education; and (b) the trust was not registered under the State charity law. The Andhra Pradesh High Court had upheld both the objections to deny the exemption, the challenge to which was before the Supreme Court.

The second decision is in CIT v. Ahmedabad Urban Development Authority2 which deals with a host of other institutions carrying out wide varieties of charitable activities, the relevant provisions being Section 2(15) of the Income Tax Act. The extent to which a charitable institution could engage itself in other activities was the precise issue in this case. The occasion for this examination arose to construe the statutory provision which excludes “carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration”.

Common observations qua charitable objects

At a larger level, the decisions converge the judicial ethos with the parliamentary intent that pursuits of charitable objectives are to be promoted and accordingly granting exemptions to such causes is a core foundational tenet of the fiscal law. At the same time, the decision stresses upon the statutorily carved exceptions to the exemption provision to highlight that their abuse or misuse would not be permitted and to that extent the tax officers are empowered to examine the affairs of the charitable institutional closely to satisfy themselves that the conditions for grant of exemption are scrupulously complied with.

In another context, both these decisions revisit the legal provisions (which have been frequently amended) as also the judicial delineation of these provisions to highlight that the initial judicial standards, which required higher compliance, appear to have slipped over time and consequently diluted. Accordingly, these decisions are an exercise in streamline the legal position by reconciling the deviations through categorical propositions, akin to a needle sewing loose threads together. On that account, the Supreme Court itself has admitted that a revisit to virtually all cases before it, is required to reconfirm the availability of tax exemptions by reviewing the facts of each case on its own merits.

As a caveat, neither of these decisions deal with tax exemptions for religious activities, which is a distinct subject-matter of consideration, though often confused with charitable objectives. Under the current extant of the income tax law, the scope of “charitable purpose” does not factor religious orientation; instead, it currently subsumes “relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility”. However, the focus on the decisions is largely on the exclusions to these purposes which is “if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity”.

Decision qua educational institutions

The bulk of the decision in New Noble3 is devoted to exemplifying a single expression used in the statutory provision; “solely”.4 The decision begins by highlighting the importance of education to pivot it “as the key that unlocks the golden doors of freedom”. On such account it acknowledges the parliamentary intent underlying the provisions of the income tax law which is to promote “scholastic instruction” in the society by fiscally incentivising institutions dedicated to its cause. The decision, however, stresses upon the fact that judicial wisdom dictates, in line with the settled law, that exemption provisions are to be construed strictly with the benefit of doubt going to the tax department and against the taxpayer.

For such reasons, the Supreme Court has revisited its earlier decisions to highlight that in view of the usage of the expression “solely”, which is closer to “only”, the intent underlying the exemption appears to be limited to those institutions which are exclusively devoted to the cause of education. To such end, the decision reverses its earlier view which approved the “predominant object test” as the benchmark to examine availability of exemption.

Expounding the law, the decision of the Supreme Court in New Noble5 is to the effect that the tax officers are permitted to closely monitor the activities of the institution claiming the exemption, by calling for annual financial records, etc. to ascertain the exclusive devotion to education-linked activities. This de facto appraisal is beside the point that even de jure, the trust deed, which marks the birth of the institution, must not contain any objective other than to carry out the educational activities. In addition, confirming their additional monitoring, the Supreme Court has confirmed the view of the High Court that registration of such institution under the local charity law is mandatory.

Acknowledging that its own decisions had muddled the clarity in law, and therefore “in order to avoid disruption” and “to give time to institutions likely to be affected to make appropriate changes and adjustments”, the Supreme Court has given this decision prospective effect.6 Thus, it is expected that the decision will not result in persecution of educational institutions who may not be meeting the strict conditions for tax exemption in the past and it is only going forward that the availability of exemption has been limited subject to their diligent compliance of the conditions.

Decision governing availability of tax exemption to other charitable institutions

Both in terms of length and coverage, the decision of the Supreme Court in Ahmedabad Urban Development Authority is significantly wider than the decision in New Noble7 decision. In the former decision, the Supreme Court has set out the rules required to be observed by all non-educational charitable institutions claiming tax exemption. Even in this case the Supreme Court has streamlined the legal position to set at naught various decisions of the Tax Tribunals and the High Courts in favour of the taxpayers, by enunciating what according to it is the correct interpretation of the exemption provision. However, in doing so, the Supreme Court has not been as magnanimous as in the case of the latter decision, insofar as the decision in Ahmedabad Urban Development Authority8 does not accord any prospective application and requires all past claims to tax exemptions to be revisited in the light of the legal position now declared by the Supreme Court.

By stock-taking its earlier precedents, the Supreme Court has confirmed the legislative intent of tax law granting preferential treatment to charitable activities but, simultaneously, stressed upon the limited play available under the statutory provisions9 in view of limitation to non-charitable activities and the consequence ineligibility to tax benefits on such account.

The Supreme Court has concluded that the institutions claiming the charitable exemption cannot be engaged in trade, commerce or business activities. However, highlighting that pre-2016 amendment of the law, a monetary threshold was applicable and post-2016 amendment the law permits up to 20% of the total receipts towards ineligible activities, the Supreme Court has made an across-the-board declaration that non-charitable activities would now be governed by these disqualifying criteria. In doing so, the court has declared the non-application of its earlier “predominant test” and given way to the statutory limitations to the ineligible activities. The institutions claiming charitable exemption must now, therefore, ensure that “any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration” is carried out within these thresholds, the compliance to which end needs to be demonstrated on a year-to-year basis.

Having declared the legal position on the construction of the statutory provision, the Supreme Court has also undertaken a broad assessment of the various parties before it, in order to determine their eligibility to claim exemption. The categories of institutions addressed by the Supreme Court can be summarised as under:

⮚ There is a prima facie assumption that the authorities, corporations, or bodies established by statute are engaged in carrying out public functions and services. Hence, their activities, even though at a price, would not generally be disqualified from the charitable exemption. Having said that, the onus is upon the tax authorities “to apply their minds and scrutinise the records, to determine if, and to what extent, the consideration or amounts charged are significantly higher than the cost and a nominal mark-up”, and in which case the tax exemption can be denied.

⮚ “The income and receipts of statutory regulatory bodies which are for instance, tasked with exclusive duties of prescribing curriculum, disciplining professionals and prescribing standards of professional conduct, are prima facie not business or commercial receipts” However, the disqualifying criterion qua statutory authorities is applicable even to these regulatory authorities.

⮚ In respect of trade promotion bodies, “the objects of purely advocating for, coordinating and assisting trading organisations, can be said to be involved in advancement of objects of general public utility. However, if such organisations provide additional services such as courses meant to skill personnel, providing private rental spaces in fairs or trade shows, consulting services, etc. then income or receipts from such activities, would be business or commercial in nature”.

⮚ Having said that, the mere fact that the authority has been engaged under a statute is not consequential. The exemption is equally available to non-statutory bodies performing public functions, if “materials-on-record show that fees or consideration charged by them for the purposes provided are nominal”.

⮚ Charitable exemption is equally available to public trusts who are similarly required to demonstrate diligent compliance towards attainment of their stated charitable activities and ensuring de minimus earnings from other activities.

⮚ The determination of issues qua sports authorities is complex. In many cases these authorities enjoy monopolistic status besides earning hefty revenues from match tickets, grant of sponsorship rights, broadcasting rights, etc. Thus, their activities require a closer examination as regards the extent to which their earnings have been spent towards promotion of sports as a charitable cause.


The two decisions of the Supreme Court have revisited the legal position in vogue for decades to reverse the tide in favour of the tax department by imposing strenuous conditions upon the institutions claiming charitable exemption. Revisiting is earlier decisions and discontinuing the “predominant object test” which supported the cause of the institutions, the Supreme Court has applied its followed the 2018 trend10 that the tax authorities have an upper hand in the interpretation of conditions under exemption provisions and the burden is upon the taxpayer to demonstrate strict compliance of these conditions towards claiming preferential status. By doing so, the Supreme Court has tectonically changed the ground rules governing tax exemption for charitable causes. These decisions will result into revisit of all claims to exemption (except in case of educational institutions) of the past assessment periods and also result into large-scale restructuring of the institutions to align their activities in line with these decisions on a going forward basis. More critically, given that the clear mandate of the Supreme Court to the tax authorities is to examine the claim on a yearly basis, it is now crucial for such institutions to get their act together and ensure diligence in bookkeeping, and even micromanagement, if need be, to ensure compliance with the rigorous standard for exemption.

† Tarun Jain, Advocate, Supreme Court of India; LLM (Taxation), London School of Economics

1. 2022 SCC OnLine SC 1458

2. 2022 SCC OnLine SC 1461

3. 2022 SCC OnLine SC 1458

4. There are various clauses in S. 10(23-C) of the Income Tax Act which relates to educational institutions. The underlying theme of emphasis on “solely” is common across these clauses. For illustration purposes, clause (iiiab) covers “any university or other educational institution existing solely for educational purposes and not for purposes of profit, and which is wholly or substantially financed by the Government”.

5. 2022 SCC OnLine SC 1458

6. Ordinarily judicial decisions are retrospective, given that a decision clarifies the law as it was always meant to be. However, in rare cases where the society and the nation has moved on a particular understanding for long and where the Supreme Court decision would adversely uproot a large cross-section, the Supreme Court exercises its inherent power to give prospective effect to its decisions. It was in the famous case of C. Golak Nath v. State of Punjab, AIR 1967 SC 1643 : (1967) 2 SCR 762 that the Supreme Court took inspiration from American jurisprudence to reserve for itself this power to make its decisions prospective, which power is not available even to the High Court.

7. 2022 SCC OnLine SC 1458

8. 2022 SCC OnLine SC 1461

9. Income Tax Act, 1961, S. 2(15).

10. Inter alia in Commr. of Customs v. Dilip Kumar & Co., (2018) 9 SCC 1.

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