Mumbai: HC relief for American School of Bombay in tax matter

Mumbai: The Bombay High Court has held that the American School of Bombay (ASB) – a prominent international school which caters to the needs of children from the expat community – is eligible for income tax (IT) exemption. A division bench passed the order while hearing a batch of petitions filed by nine trustees challenging the orders of the Income Tax (IT) department denying exemption to the school from the fiscal year 2001-02.

The school's counsel Porus Kaka argued that the main condition for claiming tax exemption under section 10(23C)(vi) of the IT Act was that it exists only for providing education and not for profit. This is clear from the trust deed. The school was set up after the US Embassy was granted specific permission by India's Ministry of External Affairs.

According to the school's plea, the main grounds for denying exemption was that the school was supported by a US-based not-for-profit organisation. South Asia International and Educational Services Foundation was subject to scrutiny by the US government and enjoyed a tax-exempt status in that country. Various expenses of the school such as salaries of teachers and administrative expenses, education grants, etc were met by the organisation. Any surplus from funds for ASB was repatriated to the school, which invested it in accordance with provisions of the IT Act.

The judges observed that the American not-for-profit entity repatriated money into India and did not receive any repatriation from India. “Thus, the money earned and expenses made by it in the US should not and ought not to concern the IT department,” said the bench in its detailed order. 

Kaka further submitted that the Central Board of Direct Taxes had clarified in its circular that mere generation of surplus by an educational institution cannot be a basis for rejection of tax exemption if it is used for educational purposes and the accumulation is not contrary to law. He also cited the Supreme Court decision of October 2022 in the case of New Noble Education Society which stated that the tax cannot be applied retrospectively. The school's counsel also pointed out that for other financial years that were subject to tax litigation, ASB had got favourable orders from the Delhi HC.