Exemption available for educational institution sec 10 (23C) & 11

When conditions are met, charitable institutions registered under section 12AA of the Act can claim exemptions under section 11 of the Act. While Section 11 is a broad rule that applies to all charitable institutions, Sec 10(23C) is a specific exemption provision that applies to certain government and non-government educational institutions.

This article discusses exemptions available for an Educational Institution u/s 10(23C) of the Income Tax Act and comparison of the same to the provisions of Sec 11 of Income Tax Act.

Educational Institutions which come under the provisions of Sec 10(23C)
(i) Government Educational Institution – Applicable Provision- Sec 10(23C)(iiiab)
(ii) Non-Government Educational Institution
> Whose gross receipt < Rs. 1 Crore (Now increased to 5 Crore) – Applicable Provision- Sec 10(23C)(iiiad)
> Whose gross receipt > Rs. 1 Crore (Now increased to 5 Crore) – Applicable Provision- Sec 10(23C)(vi)

A) Government Educational Institution
I. The first category of educational institutions that deal with income tax is those that are government-funded.
II. Under section 10(23C), any revenue obtained by a university or educational institution that exists purely for the purpose of education and is funded by the government is completely exempted (iiiab).
III. For government institutions, no special approvals are necessary.

B) Non-Government Educational Institutions
The exemption for non-government educational institution depends on the annual gross receipt of the institution.

1) Education Institutions whose gross receipt < Rs. 1 Crore (Now increased to 5 Crore)
I. Applicable provision for these institutions is Sec 10(23C)(iiiad) .
II. Income earned by any university or educational institution existing solely for educational purposes and not for profit purpose shall exempt from tax u/s 10(23C(iiiad) if total gross receipt is less than Rs. 1 Crore (Now increased to 5 Crore).
III. Annual receipt has not defined in the Act. So Annual receipt should mean all the various fees and charges collected by the Educational Institution. It can also include all the receipts from donations.
IV. No separate approval required from prescribed authority.

2) Educational Institutions whose gross receipt > Rs. 1Crore (Now increased to 5 Crore)
I. Applicable provision for these institutions is Sec 10(23C)(vi).
II. Income earned by any university or educational institution existing solely for educational purpose not for profit purpose, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad), shall exempt if they approved by prescribed authority.
III. So, where Gross Receipts exceeds Rs. 5 crore, the institution needs a separate approval from prescribed authority.
IV. For this purpose the educational institution has to make an application in Form No. 56D as prescribed in Rule 2CA with supporting documents before Commissioner of Income Tax (Exemptions). Like Approval u/s 12AA, the approval u/s 10(23C) is also available indefinitely unless it is rescinded by the authorities.
V. There are some conditions to claim exemptions u/s 10(23C)(vi) – (Third proviso to Sec 10(23C)
> Spend Minimum 85%:
* The Educational Institution shall spend its income wholly and exclusively to the objects for which it is established.
* The Institution shall apply at least 85% of the income every year. It is allowed to retain profit up to 15% of total income.
* In case the income applied falls short of 85%, then the institution shall apply the excess income for application in subsequent year(s) not exceeding 5 years.
For Example: Gross Income – Rs. 1,60,00,000/-
85% of Gross Income – Rs. 1,36,00,000/-
Actual Spent- Rs. 1,20,00,000/-
Balance Rs. 16,00,000/- can be spent with in 5 subsequent years.
* However, the accumulated amounts are required to be spent by the institution on its own. It can’t spend by way of donations to any trust registered u/s 12AA or any other institutions claiming exemption u/s 10(23C).
* The provisions are as applicable in case of institutions registered u/s 12AA. The only difference is in this case there is no need of Trustee’s resolution to accumulate the income and no need to file separate Form and specify the purpose of accumulation (unlike Form No 10 in case of Sec 12AA registered cases).

> Investments
* The institution shall invest only in the modes specified u/s 11(5), which is similar to Sec 12AA registered cases.

> Other Conditions
* Audit: (Proviso 10 of Sec 10(23C)
Where the Institution's total income, before applying the provisions of Sec 10(23C), exceeds the maximum amount not chargeable to tax in any PY, the institution must have its accounts audited and submit the report of such audit Form No. 10BB with the return of income.
* Income Tax Return
Every educational institution referred to in sub-clause (iiiab), sub-clause (iiid), or sub-clause (vi) of Section 10(23C) whose total income, without giving effect to the provisions of section 10, exceeds the maximum amount not chargeable to income-tax, is needed to file a return of such income in the prescribed form. To a Sec 12AA registered trust, Form No. ITR 7 is relevant.
* Corpus Donations to Other Trusts
Educational Institutions that are registered under section 10(23C)(vi) are prohibited from making donations to other trusts that are registered under section 12AA.

Conclusion
From the foregoing, it is obvious that all of the provisions relating to Sections 10(23C) and 11 are nearly identical. However, Institutions established under section 10(23C) may be exempt from some of the requirements for revenue accumulation, such as the need to file a separate Form and the need to describe the purposes of accumulation.