In the ITAT,
Vodithala Education Society
v.
Assistant Director of Income tax (Exemption)
II,
PRADEEP PARIKH, VICE PRESIDENT
AND N.R.S. GANESAN, JUDICIAL MEMBER
INCOME TAX APPEAL NO. 1138 (Hyd) OF 2006
(Assessment year : 2003-04)
October 31, 2007
Section 11 read with section 13(1)(c) of the Income-tax Act, 1961 - Charitable or religious trust - Exemption of income from property held under - Assessment year 2003-2004 - Whether education would remain as a charity only in a case where education is imparted systematically for a fee prescribed by Government - Held, yes - Whether a private aided or unaided professional institution or any other education institution of a state is required to collect fees with regard to infrastructure and benefit of students of that educational institution - Held, yes - Whether, however, such fees has to be fixed by committee headed by a retired High Court judge as directed by Apex Court in case of Islamic Academy of Education v. State of Karnataka (2003)) 6 SCC 697 - Held, yes - Whether collection of money over and above fee prescribed by committee would amount to collection of capitation fee and such an institution would face legal consequence from same - Held, yes - Whether receiving donations by educational institutions connected with admission of students is to be treated as collection of capitation fees - Held, yes - Whether surplus funds generated by educational institutions cannot be diverted for any other use or purpose and cannot be used for personal gain or for any other business or enterprise - Held, yes - Whether if a society runs a business incidental to attainment of object of society and separate books of account are maintained by society income derived from such business, would be treated as income derived from property held under trust - Held, yes - Whether property held under trust and charitable activity are different from each other - Held, yes - Whether establishing of an educational institution, is an activity of charity and such charitable activity, cannot be held as the property held under trust, even though income/receipt incidental to such activity would be eligible for exemption - Held, yes - Assessee-society was running an educational institution and hostels - For relevant assessment year, it filed return claiming exemption under section 11 - There was a survey operation in premises of one of colleges run by assessee, wherein several incriminating materials were seized disclosing collection of money over and above prescribed fee from students - Assessing Officer therefore, disallowed exemption under section 11 - Whether since assessee had collected money over and above the prescribed by concerned authority for admission of student, such an amount was to be classified as capitation fee and it could be said that assessee existed only for profit and not solely for educational purpose and, therefore, it could not be considered as charitable institution - Held, yes - Whether further since entire money so collected were utilized by persons interested in society, it could be said that there was a clear violation of provisions of section 13(1)(c), and therefore, assessee would not be entitled for exemption under section 11 - Held, yes – Whether, however, since Assessing Officer had taken income of one college for computation in assessment order he was required to verify income of other educational institution run by assessee - Held, yes
Section 10(23C) of the Income-tax Act, 1961 - Charitable religious institution - Assessment year 2003-04 - Whether for purpose of claiming exemption under section 10 (23C) (vi), university or other educational institution, has to get approval of prescribed authority and in absence of such approval from prescribed authority, such an institution would not be entitled for any exemption under section 10(23)(vi) Held, yes - Whether where assessee-society had not got approval of prescribed authority, it would not be entitled for any exemption under section 10(23) (vi) - Held, yes
Section 143 read with section 10(23C) of the Income-tax Act, 1961 - Assessment - General - Assessment year 2003-04 - Whether Assessing Officer may pass an order under section 143(3) without giving effect to provisions of section 10, provided, he informs prescribed authority/Central Government as case may be and approval granted earlier to university college or other institution is withdrawn or rescinded - Held, yes - Whether in case no approval is granted by prescribed authority earlier to such an institution, there is no need for Assessing Officer to intimate to prescribed authority before passing assessment order, under section 143(3) - Held, yes
Per court
The Apex Court in case of Islamic Academy of Education v. State of Karnataka (2003) 6 SCC
697 directed all the State Government to constitute a committee headed by a
retired High Court judge for prescribing fee structure for professional
colleges. The
To add further to this, the Tribunal observed that the collection of
money over and above the fees prescribed by the Committee appointed as per the
directions of the
FACTS
The assessee - society was running educational institutions and
hostels in the States of Andhra Pradesh
and Maharastra. For the relevant
assessment year, the assessee filed return claiming exemption under section
11. There was a survey operation in the
premises of one of the colleges run by the assessee from where several
incriminating materials were seized which revealed collection of money over and
above the prescribed fee from the students under the management quota, one of
the employees, i.e., ‘R’ of the said institution was examined during the course
of survey. It appeared that the assessee
initially applied for approval of the prescribed authority for exemption as
provided in section 10 (23C)(vi) where the same was
rejected. When the same was brought to
the notice of the assessee by the Assessing Officer, the assessee claimed that
it had the option to choose between two exemptions viz, 10(23C)(vi)
and section 11, therefore, the assessee claimed exemption under section
11. However, the Assessing Officer found
that such a choice was not available to the assessee, and section 11 does not
authorize deduction from total income and therefore, assessee was not entitled
to any exemption under section 11. On
appeal, the Commissioner (Appeals) found that since there was violation of the
provisions of section 13(1)(c) by utilizing the funds of the society by
the persons interested, assessee was not entitled to any exemption under
section 11.
In the instant appeal, the assessee contended that the income derived
by the assessee from other educational institutions was not considered by the
Assessing Officer; and that when the assessee specifically claimed exemption
under section 11, the Assessing Officer ought not to have considered the claim under
section 10(23C); and that opportunity to cross examination of above said
employee was not given to the assessee.
Applicability of
section 11
HELD
Section 11 provides for exemption of income from the total income from
the property held under trust for charitable or religious purpose. For the purpose of claiming exemption under
section 11 the assessee has to make an application under section 12A for
registration. One of the prerequisites
for making such application under section 12A is that the assessee should be a
religious or charitable institution or trust.
Admittedly, the main activity of the assessee-society was to run
educational institutions. The
Legislature in their wisdom enacted section 10(23C)(iiiab), 10 (23C)(iii
ad) and 10(23C)(vi) for grant of exemption of income in
respect of universities or institutions which exist solely for education
purpose and not for profit. From the
material place on record it appeared the assessee filed an application before
the concerned authority for registration under section 12A, and the same was
granted with effect from 1-4-2001)
[Para 6]
It was to be examined further
that whether the assessee-society was a charitable institution or not. Charitable purpose has been defined by the
Legislature in section 2(15), as per said section ‘Charitable purpose includes
relief of the poor, education, medical relief and the advancement of any other
object of general public utility’.
From the above, it is obvious that “education” is included in the
charitable purpose. Admittedly, the
assessee-society was running educational institutions. The next question that falls for
consideration was when an assessee collects money over and above the fees
prescribed by the Government, whether it constitutes a charitable institution or not. The Apex Court in the
case of Miss Mohini Jain v. State of Karnataka (1992) 2 SCC 666
considered the issue of capitation fee collected by the private educational
institutions. It was held in that case
that capitation fee is nothing but a price for selling education. The concept of ‘teaching shop’ is contrary to
the constitutional scheme and is wholly abhorrent to Indian culture and
heritage. Some of the State Legislatures
passed legislation prohibiting the collection of capitation fee and also made
the same as a punishable offence. [
The
Collection of capitation fee in contrary to the constitutional scheme
and prohibited by state enactment. Moreover, education was used as an
apparatus/mode to collect capitation fee. In other words exorbitant money was
collected illegally in the guise of running the educational institution.
When the assessee used the charitable activity educational institution
as an apparatus for selling the education, the element of charity no longer
remained in the activity of the assessee.
In other words, when the assessee the sells of a professional course and
collected capitation fee, the activity of assessee cannot remain a charitable
activity, within the meaning of section 2(15). Education would remain as a charity only in a
case where the education is imparted systematically for a fee prescribed by the
Government. It is not the intention of
the Parliament to recognize any body/society or institution as a charitable
institution where ‘education’ is a saleable commodity. In the instant case, the material found
during the course of survey operation clearly established the collection of
money over and above the fee prescribed by the Government for admission of a
student. Therefore, it was a clear case
of sale of education by the assessee-society.
Thus, the assessee could not be considered as a charitable institution
under section 2(15). Therefore,
the assessee was not eligible for exemption under section 11. [
The Tribunal added, further to this and held that the collection of
money over and above the fees prescribed by the Committee appointed as per the
directions of the
Therefore, any income derived from the property held under trust for
charitable purpose, should not be included in the total income. In the instant case, admittedly, the assessee
was not holding any property under trust for charitable purpose. It was also not the case of the assessee that
any income was derived from the property held under trust for charitable
purpose. Moreover, it was also not the
case of the assessee that any income in the form of voluntary contributions was
received with a specific direction to form part of the corpus of the
society. The assessee-society was
running educational institution and deriving income from such institution. The assessee had also collected money over
and above the fees prescribed for admitting students under management
quota. In other words, the educational
institution was used as a tool/apparatus for collecting money over and above
the fees prescribed. The
assessee-society had no other source of income / receipt. The society, owns the educational
institution. The Legislature have
visualized two situations. One is
religious and another is charitable.
Section 11 provides for exemption in respect of income derived from
property held under trust for charitable and religious purpose. As already observed ‘Education’ falls
within the definition of charitable purpose.
Therefore, any income derived from property held under trust for
charitable purpose and applied for education, is eligible for exemption under
section 11. In the instant case,
admittedly, the assessee had not derived any income from any property held
under trust. The only source of receipt
was the education itself, i.e., from educational institution. [
The next question that fell for consideration was whether the
educational institution owned by the assessee society would be regarded as a
property held under trust by the society.
Section 11 speaks of the property held under trust. The Legislature visualized two
situations. One is income derived from the
property held under trust and another is application of that income derived
from the property held under trust for a charitable purpose. Therefore, there is a clear distinction
between the property held under trust and the charitable activity. In the instant case, the assessee society was
carrying on charitable activity by establishing educational institution. Therefore, the charitable activity of the
assessee was education. The income if
any derived from the property held under the Trust and applied for the
educational activity, would be construed as application of income for the
purpose of charitable purpose.
Therefore, the expenditure incurred in establishing the educational
institution namely acquisition of land, construction of building etc., are all
application of income for charitable activity.
If any income was generated in the course of educational activity, the
said income would be construed as if it was generated in the course of carrying
on the charitable activity. Therefore,
such receipt/income received in the course of carrying on charitable activity
also eligible for exemption provided the same was applied or set apart for
educational purposes. However, such
receipt/income could not be constructed as derived from property/ business held
under trust. Since such receipt/income
is inevitable or consequential while carrying on the activity of education,
such income also becomes eligible for exemption. The educational institution is an apparatus
for carrying out the charitable activity. Therefore, the educational institution or
charitable activity itself cannot be construed as the property held under
Trust. As already observed, that
establishing educational institution is an activity of charity. Therefore, by any stretch of imagination, the
charitable activity, cannot be held as the property held under trust, even
though the income/receipt incidental to such activity is eligible for
exemption. However, the money collected
over and above the prescribed fee for admitting students cannot be construed as
income derived from/incidental to the activity of carrying on charitable
activity. [
It is well settled principles of law that a business held under a trust
is also a property. Section 11 (4) also
makes it very clear that the property held under the trust includes a business
undertaking. If the assessee society
runs a business incidental to the attainment of the object of the society and
separate books of account are maintained by the assessee, the income derived
from such business, shall be treated as income derived from the property held
under the trust. The
The Kerala High Court in the case of Brahmin Educational Society v.
Asstt. CIT (1997) 227 ITR 317 (1996) 89 Taxman 434 considered a similar
question and observed that section 11(4) cannot over ride section 10(22). The language of section 10(22) is
analogous with provisions of section 10(23)(c)(iiiab), 10(23)(c)(iiiad)
and 10(23)(c)(vi).
Therefore, the judgment of the
Even otherwise, the material available on record, which was found
during survey operation clearly showed the receipt of money over and above the
fees prescribed by the committee constituted by the Government, for admitting
the students under the Management Quota.
The material found during the course of survey operation, further
established that the money collected over and above the prescribed fee for
admitting students was paid to the Chairman and other interested persons of the
society. Therefore, there was a clear
violation of the provisions of section 13(1)(c). Under section 13(1)(c) if any part of
income of the institution, is used or applied directly / indirectly for the
benefit of a person, i.e., the founder or any interested person, as
referred to in section 13(3), then the assessee shall not be entitled to
exemption under section 11 and 12.
Therefore, the assessee was not entitled for exemption under section 11.
[
Applicability of various clauses of section 10(23C)
Section 10 (23) (iiiab) refers to educational institution
or university, which is wholly or substantially financed by the
Government. In instant case, the
assessee society, was not financed by the Government either wholly or
substantially and therefore, the provisions of section 10(23C) (iiiab)
were not applicable. It was to be seen
further that whether the assessee society would fall under section 10 (23C)(iiiad). Section 10(23C) (iiiad) would
be applicable in case the assessee’s annual receipts do not exceed Rs. 1
crore. In the instant case, the
assessee’s annual receipt admittedly exceeded Rs. 1 crore. Therefore, the provisions of section 10(23C)
(iiiad) was also not applicable. Now
what remained was section 10(23C) (vi) which provides for exemption of
income of any university or other educational institutions existing solely for
educational purpose and not for profit.
In this case, the assessee society is admittedly not an university. However, the assessee society is running
educational institutions and receiving income from such institutions. [
It was to be seen further that when a society which runs / owns an
educational institution, whether such society itself would be regarded as
‘other educational institutions’. The
Therefore, it is obvious that the assessee society would fall within
the term ‘other educational institution’. [
Now it was to seen as to let us now examine whether the provisions of
section 10 (23C)(vi) would be applicable to the assessee or
not. For the purpose of claiming
exemption under section 10(23C)(vi), the university or the other
educational institution, has to get the approval of the prescribed
authority. The prescribed authority, is
the Chief Commissioner or the Director General of Income tax. The purpose of designating the senior most
officers of the Income-tax Department, as Prescribed Authority, clearly shows
that, before granting approval, a thorough examination has to be made and find
out whether the assessee society is existing solely for educational activity
and not for profit. In the instant case,
as seen from the assessment order, the prescribed authority, rejected the
application made by the assessee for approval.
It was also not the case of the assessee that the necessary approval was
obtained from the prescribed authority.
In the absence of such approval from the prescribed authority, the
assessee was not entitled for any exemption under section 10(23)(vi).
[
Further more, the assessee had to establish that the running of
educational institutions was not for the purpose of profit. The assessee had no independent source of
income other than the income from the educational institutions. During the course of survey, admittedly, the
revenue authorities found incriminating material which showed the collection of
exorbitant amounts from the students, who were admitted under the management
quota. ‘R’ who was examined in the
course of survey proceedings admitted that the money collected from the
students who were admitted under management quota were concealed income of
society. He also further stated that the
monics collected under the management quota were handed over to the chairman
and other persons interested in the society.
However, ‘R’ was not cross-examined by the assessee. The Assessing Officer had placed reliance on
the totality of the material seized during the course of survey operations and
not only on the statement recorded during the course of survey from ‘R’. Even otherwise, as held by the Madras High
Court in the case of T. Devasahaya Nadar v. CIT (1964) 51 ITR 20
it cannot be said as a general proposition of law that any evidence upon which
the department might rely should have been subjected to cross examination. In the instant case, the statement of ‘R’ was
already brought to the notice of the assessee.
Even otherwise if we ignore the statement received from ‘R’ was ignored
the material found during the course of survey operation clearly showed that
the assessee-society collected money over and above the fees prescribed by the
Government for admitting the students under the management quota. With that background, it was to be examined whether the collection of
the money over and above fees prescribed by the
Government from the student or their parents for admitting under the
management quota would have any profit motive or not. [
Under article 41 of the Constitution, it is the responsibility of the
State to provide education to all citizens of the country. The State may discharge its obligation
through State owned or State recognized educational institutions. When State/Central Government grants
recognition to the private educational institutions, it creates an agency to
fulfill its obligation under the Constitution.
Therefore, the private institutions, are functioning as agents of the
State / Central Government. It is the
primary responsibility and obligation of the State to provide education to the
citizens. Therefore, the educational
institutions while acting as agents of the State have to collect the fees as
prescribed by the Government. The
students are given admission to the private educational institutions in
recognition of their ‘right to education’ under the Constitution. Therefore, charging of any amount over and
above the fee prescribed by Government, either as capitation fee or otherwise,
in consideration of admission to educational institution, is a patent denial of
a citizen’s right to education under the Constitution. Education is in the concurrent list of the
Constitution. Therefore, both the
Central the State Governments are competent to enact law with regard to
education. In other words, it is the
responsibility/obligation of both the Central and the State Governments to
provide education to all the citizens of the country. Despite various cultural and linguistic
differences,
Due to efflux of time and civilization, the earlier ‘Gurukulams’ are
now called as schools, colleges. In
other words, it is known as educational institutions. However, the Indian civilization continue to
recognize education as one of the pious obligation of the human society. When the people of the country considered
education as a pious one, it cannot be made as a saleable commodity in the
guise of encouraging private institution to support the State in the process of
establishing educational institutional.
To establish and administer educational institutions, are considered to
be a charitable object. The way in which
the exorbitant amounts were collected by the assessee society for admission
under the management quota, showed that they were not administering the
educational institutions for pious and charitable purpose, but, with a profit
motive. When an assessee sells the seat
of the professional course in a college and collects money, it can be said that
there is profit motive involved in it.
In other words, when an assessee admits students under management quota
in consideration of an amount, which is over and above the fees prescribed by
the Government, it can be said that there is no profit motive involved in
it. When the assessee collects money
over and above the fees prescribed by Government, it clearly exposes the
intention of the assessee to earn profit.
It is also to be remembered that collection of capitation fees for
admission to any educational institution is made as an offence punishable in
this country. In spite of that, the
assessee was bold enough in collecting the money over and above the fees
prescribed by the Government. [
The
From the above observation of the
In the instant case, the assessee even though claimed that the fees for
the entire 4 years was collected, the same was not deposited/invested in any
bank as per the direction of the
In view of the above observation of the
Applicability of provision of section 143(3)
Section 143(5) the Government and the prescribed authorities are
required to be informed before passing any order without giving effect to the
provisions of section 10.
As per first proviso to section 143(3), the Assessing Officer may pass
an order without giving effect to the provisions of section 10(23C),
provided, he informs the prescribed authority/Central Government as the case
may be and the approval granted earlier is withdrawn or rescinded. In the instant case, it was not the case of
the assessee that any approval was obtained from prescribed authority. In fact, as seen from the assessment order,
the prescribed authority, rejected the application of the assessee for
approval. The question of intimating the
prescribed authority and waiting for withdrawal of approval may be necessary in
a case where approval was granted earlier.
Since no approval was granted by prescribed authority earlier, there was
no need for the Assessing Officer to intimate to the prescribed authority
before passing the assessment order, without giving effect to the provisions of
section 10 (23C)(vi). [
Computation of income
The other contention of the assessee was that the Assessing Officer had
taken the income of the one college for computation in the assessment
order. The revenue also conceded that
the Assessing Officer had taken only the income of one college; therefore, the
Assessing Officer might be asked to verify the income of other educational
institution run by the assessee. In view
of the above submission of the assessee and the revenue. The Assessing Officer
might verify the income of the other educational institution run by the
assessee society and the Assessing Officer would be at liberty to rectify the
computation of income in the assessment order under section 154. The confirmation of the assessment order by
the Commissioner (Appeals) and the Tribunal could not be treated as a bar for
verifying for income of the other educational institution and rectifying the
computation of the assessment order. In
other words, the Assessing Officer was at liberty to rectify the computation of
income alone in the assessment order. [
In view of the above discussion, there was no any merit in the appeal
of the assessee, accordingly, the same was to be dismissed. [
CASE REVIEW:
Brahmin Education Society v.
Asstt. CIT (1997) 227 ITR 317/(1996) 89 Taxman 434 [Para 14]; CIT v.
Saraswati Poor students fund [1984] 150 ITR 142 (1985) 20 Taxman 211
[Para 14]; Adiranan Educational
Institution v. Asst. CIT (1997) 224 ITR 310 (SC) [Para 16]; T.M.A.
Pai Foundation v. State of Karnataka (2002) 8 SCC 481 [Para 20]; and
Islamic Academy of Education v. State of Karnataka (2003) 6 SCC
697. [