Impact of 2022 SC judgement of New Noble Education Society:

A. What is charitable purpose?

1. As per 2(15) of the Income Tax Act, the term “charitable purpose” includes relief of the poor, education, medical relief, and any other object of general public utility.
2. However, after the 2008 amendment to the Income Tax Act, an additional condition was introduced. If any entity involved in activities related to “general public utility” engages in commercial activities for profit, it cannot be treated as a charitable institution.

B. Important observations of the Supreme Court in the case of New Noble Education Society (2022) 143 Taxmann 276:
1. The educational institutions can generate a reasonable surplus from their activities, but it should be incidental to their charitable objectives.
2. The surplus generated by the institution can be used for its expansion, improvement of facilities, or to meet operational costs, which is permissible.
3. The 'Predominant Test' previously applied in cases such as American Hotel and Queen's Education Society, which allowed for primary rather than exclusive educational use to qualify for tax exemptions was rejected. The term 'solely' means 'to the exclusion of all others', a stricter standard that ensures educational activities are not diluted by commercial interests.
4. If an educational institution is required under such laws to obtain registration, then such registration should be obtained for the purposes of seeking approval under the IT Act.

C. Impact on other charitable institutions:
1. By explicitly stating that incidental business activities must be directly related to the main objectives of an institution, the SC has provided a clearer framework for what activities may qualify for tax exemptions.
2. This decision also underscores the necessity for institutions to comply with relevant state laws, as non-compliance could result in the denial of tax benefits, thereby impacting their operational status and financial health.
3. There is also a clear emphasis on the importance of aims, mission statement, objects etc as spelt out in the charter documents of such institutions which are closely scrutinised before granting registration to such institutions.

Note: Hon SC in Baba Banda Singh Bahadur Trust (CA No 10511 of 2013) has held that exemption can be granted to educational institutions only if it exists solely for the purpose of educational purposes and the term “solely” should be read to mean ‘to the exclusion of all others (in line with Noble Education Judgement)