(2015) 372 ITR 699 (SC)
Application for registration of NPOs; regular income of a registered NPO
No. Where the surplus arises incidentally and is ploughed back into the educational activity, the institution does not exist for profit. Generating a surplus is not the same as having a profit motive.
Does an educational institution that generates a surplus thereby exist 'for purposes of profit' and lose its exemption?
The societies ran schools and recorded surpluses of receipts over expenditure across the relevant years. The surpluses were applied towards the construction of school buildings and the acquisition of educational infrastructure; nothing was distributed to members. Exemption was denied on the ground that the systematic generation of surplus showed that the institutions existed for purposes of profit rather than solely for education.
The Uttarakhand High Court decided against the societies, relying on the existence of surpluses. Conflicting approaches had been taken by different High Courts. The Supreme Court took up the matter to resolve the position and reviewed the earlier authorities on the point.
For the assessee
Every institution must generate some surplus to remain viable, to maintain its plant and to expand. What matters is not whether a surplus arises but what becomes of it. Here it was entirely reinvested in the educational activity and no member benefited, so no profit motive existed.
For the Revenue
Substantial and recurring surpluses demonstrate that fees were fixed at a level designed to yield profit. An institution that consistently makes money from its activity cannot be said to exist solely for education and not for purposes of profit.
The Court held that the approach taken below was wrong in principle. The correct test looks to the purpose for which the institution exists and to the destination of any surplus, not to the arithmetical fact that receipts exceeded expenditure. An institution that must generate a surplus to remain solvent, to maintain its facilities and to expand its activity, and that applies that surplus to its own educational infrastructure rather than distributing it, does not thereby exist for purposes of profit. The Court reviewed the earlier decisions and disapproved those which had treated the mere existence of a surplus as disqualifying, restoring the position that the predominant object of the activity governs. It cautioned that the position would differ if the surplus were diverted to the benefit of members or applied to non-educational ends, and that the enquiry remains one of fact in each case.
Frequently needed under the IT Act 2025 where an Assessing Officer points to accumulated surpluses as evidence of commerciality. It must now be read alongside New Noble, which tightened the 'solely' requirement at the level of objects, and alongside the Section 346 restriction on commercial activity — Queen's answers the surplus point but does not cure a defectively drafted objects clause.