In the ITAT,
Vodithala
Education Society
v.
Assistant
Director of Income tax (Exemption) II, Hyderabad
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
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
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
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). [Para 23 and 24]
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. [Para 25]
In view of the above
discussion, there was no any merit in the appeal of the assessee, accordingly,
the same was to be dismissed. [Para 26]
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. [Para 20]
followed.