Systematic Instruction Essential for ‘Education’ Tax Exemption: Delhi High Court

High Court Clarifies Educational Activities Must Involve Structured and Formal Schooling to Qualify Under Section 2(15)

The Delhi High Court has upheld the Income Tax Appellate Tribunal’s (ITAT) decision favoring the assessee, affirming its classification under Section 2(15) of the Income Tax Act. The case revolved around the definition of “education” and whether the activities conducted by the assessee constituted charitable educational activities or commercial services.

The assessee, a society registered under the Societies Registration Act, 1860, and holding registration under Section 12A of the Income Tax Act, 1961, claimed exemption on the grounds of imparting education. The Assessing Officer initially accepted this claim. However, the Commissioner of Income Tax (Exemptions) [CIT€] revised this assessment, arguing that the assessee’s activities did not meet the criteria for “education” under Section 2(15), and classified the activities as commercial, leading to a reassessment and demand for taxes. The ITAT later overturned the CIT€’s decision, prompting the Revenue to appeal to the Delhi High Court.

The court focused on whether the assessee’s activities met the legal definition of “education.” It referenced the Supreme Court’s decisions in Lok Shikshana Trust vs. CIT and New Noble Educational Society vs. CIT, emphasizing that “education” entails “systematic instruction, schooling, or training given to the young in preparation for the work of life”.

The High Court observed that the assessee’s courses were conducted systematically with a fixed curriculum and attendance requirements, comparable to formal schooling. The court noted that these activities included classroom instruction, computer labs, and other infrastructure essential for educational training, thereby satisfying the educational criteria under Section 2(15).

The court examined the CIT€’s argument that the assessee’s receipt of fees from students and corporate donations (subject to TDS under Section 194J) indicated commercial activity. The High Court dismissed this, noting that corporate donations were primarily driven by CSR obligations and did not imply a profit motive. Additionally, the court found that the fees charged were significantly lower than market rates, and the surplus was used for furthering educational activities, reaffirming the charitable nature of the assessee’s operations.

The court extensively analyzed the legal principles underlying the definition of education. It highlighted that the mode of imparting education, including virtual modes, should adapt to technological advancements without altering the fundamental nature of educational activities. The High Court concurred with the ITAT’s view that the structured and systematic process followed by the assessee aligned with the Supreme Court’s interpretation of “education”.

“The systematic instruction, schooling, or training criterion must be met for activities to be considered educational,” the court noted, referencing Lok Shikshana Trust. “The method of delivery, whether physical or virtual, does not detract from the educational nature if it fulfills the criteria of structured and systematic instruction”.

The Delhi High Court’s judgment reaffirms the broader interpretation of “education” under Section 2(15), aligning with the Supreme Court’s precedents. By upholding the ITAT’s decision, the court emphasized that educational activities need not be confined to traditional forms but must maintain systematic and structured instruction. This decision is expected to have significant implications for similar charitable institutions seeking tax exemptions under the Income Tax Act.

Date of Decision: 26 July 2024