Facts of the Case

The assessee, a society running educational institutions, applied for approval under Section 80G of the Income-tax Act to enable donors to claim tax deductions on donations made to it. The Commissioner of Income Tax (Exemptions) rejected the application on the ground that the institution was not engaged wholly in charitable activities and that it generated surplus income, indicating a profit motive.

The Commissioner observed that the activities of the institution did not satisfy the conditions prescribed for granting approval under Section 80G. Aggrieved by this rejection, the assessee preferred an appeal before the Income Tax Appellate Tribunal. 

Issues Involved

  1. Whether an educational institution generating surplus can still be regarded as charitable.
  2. Whether the activities of the assessee fall within the scope of “charitable purpose” under Section 2(15).
  3. Whether the assessee is eligible for approval under Section 80G. 

Petitioner’s Arguments (Assessee)

  • The institution is engaged exclusively in imparting education, which is specifically recognized as a charitable purpose under the Act.
  • Surplus generated from operations is incidental and is entirely utilized for furthering educational objectives.
  • The institution holds valid registration under Section 12A, evidencing its charitable character.
  • No part of the income is distributed to members, trustees, or any private individuals.

Respondent’s Arguments (Revenue)

  • The institution charges substantial fees and accumulates surplus, indicating commercial activity.
  • The scale of operations suggests that the activities are not purely charitable.
  • Approval under Section 80G requires strict compliance to ensure that donations are used solely for genuine charitable purposes.

Court Order / Findings (ITAT)

  • Imparting education is inherently a charitable activity under Section 2(15).
  • Mere generation of surplus does not negate charitable status if such surplus is applied toward the institution’s objectives.
  • There was no evidence of diversion of funds for private benefit or non-charitable purposes.
  • Registration under Section 12A supports the genuineness of the institution’s charitable activities.
  • Rejection of Section 80G approval solely on the basis of surplus generation was unjustified.

Important Clarification

An educational institution does not lose its charitable character merely because it generates surplus, provided the surplus is reinvested in its educational activities and not distributed for private gain.

Link to download the order https://itat.gov.in/public/files/upload/1623739208-bal%20bharti%20for%20uploading.pdf

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