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Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI JASON P BOAZ
Per N.V. Vasudevan, Vice President ITA No.2707 to 2709/Bang/2017 are appeals by the Revenue against three orders all dated 27.9.2017 of CIT(A)-14, Bangalore relating to AY 2012-13 to 2014-15. The Assessee has filed C.O.No.42, 40 & 41/Bang/2017 in the appeals filed by the Revenue against the very same order of CIT(A) for A Y 2012-13 to 2014-15 respectively.
The issues that arise for consideration in the appeals by the Revenue and the CO’s of the Assessee are identical and arise under identical facts and circumstances. The appeals as well as the C.O.’s were heard together. We deem it convenient to pass a common order.
The revised grounds of appeal filed by the revenue in all the three appeals are identical. For the sake of reference, the grounds raised in AY 2012-13 are given below: 1. The CIT(A) is opposed to facts and circumstances of the case.
Whether in the facts and circumstances of the case, the CIT(A) is right in holding that the assessee is
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eligible for exemption u/s 11 and 12 of the I.T. Act, 1961, though the assessee trust has collected more than the fee declared or notified in respect of NRI/NRI sponsored and others quota i.e., Management quota in the garb of voluntary contributions/corpus fund and this fact of collecting more than the fee notified has been proved without any dispute in as much as the assessee itself furnishing the details?
Whether the CIT(A) was right in law in stating that there was no surplus though the assessee has a net surplus of 30.80% before allowing depreciation and 16.90% after allowing depreciation in the current year and the same in respect of other assessment years as given below :
Whether the Hon'ble CIT(A) was right in law in not following the Hon'ble Supreme Court decision in the case of M/s. Visvesvaraya Technological University wherein constant increase in surplus year after year by way of collection of fee/money under various heads more than what they require to spend for the purpose for which they collect would not amount to reasonable surplus but would amount to more surplus though the trust is collecting Rs.33,85,61,610/- as other income during the year ?
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Any other grounds to be raised at the time of filing hearing the appeal
The grounds of appeal are identical in AY 2013-14 & 2014-15 except for the quantum of other income which should have been Rs.41,36,94,143 and Rs.47,66,73,657/- for AY 2013-14 & 2014-15 but has wrongly been written as Rs.33,85,61,610 in the grounds of appeal for all the three AYs.
The Assessee is a trust which came into existence by virtue of a trust deed dated 3.10.1979. The objects of the trust are admittedly for imparting education by running schools and colleges. The Assessee was granted registration u/s.12A(a) of the Income Tax Act, 1961 (Act). The Assessee filed return of income for all the aforesaid three AYs, declaring nil income. In the course of Assessment proceedings u/s.143(3) of the Act, the AO noticed that the Assessee had disclosed a sum of Rs.33,85,61,610/- for AY 2012-13, Rs.41,36,94,143/- for AY 2013-14 and Rs.47,66,73,657/- for AY 2014-15 as other income. The AO called upon the Assessee to furnish the details of other income such as source of income, name and address of the parties etc., and the purpose for which the amount was received.
On analysis of the details furnished by the Assessee in response to the query of the AO, the AO noticed that 90% of the other income
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was amount collected by the Assessee from students either at the time of admission or during the course of academic year. The AO noticed that the other income for AY 2012-13 was broken upon by the Assesssee as Miscellaneous Income at Rs.15,44,02,987/- and balance sum of Rs.18,41,58,623/- was accounted under various heads like CIL Charges, e-learning charges, sports fee, cultural fee, e-library fee, language fee, uniform fee, alumni fee, graduate fee etc. The AO was of the view that in the form of other income the Assessee was collecting capitation fee. He was of the view that the Assessee was collecting fee over and above the fees fixed by the Government in respect of all categories of students. He observed that collection of capitation fee was deprecated by the Hon’ble Supreme Court in several decisions. He was of the view that if an educational institution collected capitation fee then such an institution should be considered as existing for profit and for charitable purpose within the meaning of the definition of Charitable purpose under Sec.2(15) of the Act.
The AO has made a reference to the Karnataka Educational Institutions (Prohibition of Capitation fee) Act, 1944 (Act No.23 of 2011) which provides that fees to be collected for various quotas have to be on the basis of consensual agreement. Higher fees could be collected for certain categories of admission to subsidize cost of education to other students. The case of the AO was that the Assessee is not permitted to collect any additional fee in the form of voluntary
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contribution/corpur donation. His case is that the assessee has been collecting the so called miscellaneous and other fee form the students /parents of management/NRI quota student for several years violating the terms and conditions of consensual agreement and the provisions of Karnataka Educational Institutions (prohibition of capitation fees) Act, 1984. The AO thereafter observed that the assessee for the F.Y. 2011- 12 relevant to A.Y. 2012-13 had gross receipts from educational activities of Rs.143,24,84,900/-. After considering the revenue expenditure incurred, the net surplus was 30.80% before allowing depreciation and 16.90% after allowing depreciation computed as under:-
The AO made similar computation of net surplus after and before depreciation for AY 2007-08 to 2011-12 as follows:-
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The AO noticed from the above table was that the assessee has been generating net surplus margin before depreciation in the range of 31% to 37% and after allowing depreciation, the net surplus was varying between 16% and 29%, over a period of six assessment years starting from A.Y. 2007-08 to 2012-13. He concluded that the assessee has been generating huge amount of surplus/income for the past several years which can be termed as unreasonable surplus as held by the Hon'ble Supreme Court in the case of P A lnamdar and Islamic Academy (Supra). The AO was of the view that in the light of the above mentioned facts and circumstance of the case, that the Assessee does not exist wholly and exclusively for the purpose of education and the educational institutions are being used for the purpose of generating huge amount of surplus as against the ruling given by the Hon'ble Supreme Court in the case of P.A. Inamdar (supra) and also the decision of the Hon'ble Court of Karnataka in the case of
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Visvesvaraya Technological University (supra). Accordingly, he issued show cause notice to the Assessee calling upon the Assessee to show cause as to why the Assessee should not be regarded as not engaged in charitable activities in the nature of education as envisaged u/s 2(15) and therefore not eligible to claim exemption u/s.11 of the Act of the net surplus in the profit and loss account.
The AO has referred to a written submission filed by the Assessee dated 23.3.2015 but has not set out the contentions of the Assessee in the said submissions. Thereafter the AO proceeded to rely on the decision of the Hon’ble Karnataka High Court in the case of Visveshwaraya Technological University Vs. ACIT 362 ITR 279 (Karn.) in preference to the decision of the Hon’ble Supreme Court in the case of Queen’s Educational Society. He observed that as per the decisions of Hon’ble Supreme Court on the issue, the predominant object of the trust as to whether it is providing education has to be seen for allowing exemption u/s11 of the Act. He held that if an education institution is collecting exorbitant amount of fee from the students to impart education resulting in huge amount of surplus i.e. more than15%, consistently year after year, then it cannot be called as profit incidental to the main activity of imparting education. Similarly, in a case, if an education institution is collecting fee as fixed by the government/relevant authority but collects additional fee/capitation fee voluntary from the students in the garb of
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contributions/donations/corpus donations resulting in huge amount of surplus i.e. more than 15%, consistently year after year, then it cannot be called as profit incidental to the main activity of imparting education. In this case, such institution is not earning the income lawfully to the extent of so called voluntary contributions/donations/corpus donations and, therefore, at the outset it cannot be considered as existing solely for education purpose. He held that under the above two circumstances, the predominant object of the activity is to earn profits and, therefore, such institution/trust cannot be termed as existing solely for education/charitable purposes and not to earn profit, though such huge amount of surplus is utilised/accumulated towards the objects of the trust/institution. He thereafter concluded that the Assessee cannot be regarded as eligible to exemption of surplus from tax u/s.11 of the Act, for the following reasons: (a) Though the assessee is lawfully collecting fee, but the amount of fee collected is resulting in unreasonable surplus year after year in the range of 50-60% and, therefore, the predominant object or the activity of the assessee trust is to make profit rather than existing solely for educational purposes. (b) The assessee was using educational institution as an apparatus/tool to make profit which in turn has resulted in unreasonable surplus.
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(c ) The assessee has not applied the huge amount of surplus generated year after year but simply accumulated in the form of fixed deposits and bank balances etc.
The AO thereafter made a reference to the decision of Hon’ble Supreme court in the case of Visvesvaraya Technological University (supra), which was an appeal from the decision of the Hon’ble Karnataka High Court wherein it was held that constant increase in surplus year a year by way of collection of fees/monies under various heads, more than what they require to spend for the purpose for which they collect such amounts, would not amount to "reasonable surplus" and it would indicate that the institution is systematically making profit. The AO also made a reference to the decisions of the Hon'ble Supreme Court in the cases of P.A Inarndar vs. State of Maharashtra (6 SCC 537) and Islamic Academy of Education vs. State of Karnataka (6 SSC 697) wherein it was held that the existence of profit or surplus up to 15% of receipts can be considered as reasonable and necessary for sustenance and expansion of the institution. It is further observed by the Hon'ble Supreme Court that an institution cannot charge anything unreasonable under the guise of surplus and make/profit, indirectly or systematically, and then claim that they are established for educational purpose and not for purpose of profit. The AO finally held that the assessee is not eligible to claim exemption u/s 11 & 12 and completed
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the Assessment of the Assessee for the AY 2012-13 to 2014-15 by applying the regular provisions of Act as envisaged under Chapter IV.
Before CIT(A), the Assessee submitted that the conclusion drawn by the AO are not factually correct. The Assessee submitted that it had not violated the provision of Karnataka Educational Institutions (Prohibition of Capitation Fees) Act of 1984. He drew attention of the CIT(A) to the observations of the AO in the order of assessment wherein the complaint of the AO was that income under the head other income was money collected under various heads was in fact capitation fee with a different nomenclature. The Assessee also made a reference to the order of the AO wherein the AO has agreed that the assessee was collecting fee lawfully. The Assessee brought to the notice of the CIT(A) that there was no increase in the surplus margin generated by the Assessee. Drawing attention to the chart prepared by the AO and set out in the order of assessment, the Assessee pointed out that even as per the chart prepared by the AO, the surplus margin has decreased from 2007-08 to 2011-12 i.e., net margin before depreciation came down to 31% in 2011-12 from 37% in AY2007-08. for the institution even from the table prepared by the AO at para 4.23 of the assessment order at page 17. It was stated that the surplus margin has income reduced from 2007-08 from 37% without depreciation to 31% in 2011- 12. It was contended that the AO has read in the reverse direction to draw a conclusion that there is an increase in the net surplus. The
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Assessee submitted that surplus has to be determined with reference to the computation permitted u/s.11 and not in the manner prepared by the AO at para 4.23 of the assessment order.
The CIT(A) formulated the following points as arising for his consideration:
(1) Whether the assessee has violated the Karnataka Educational Institutions (Prohibition of Capitation Fees) Act of 1984 as alleged by the AO in para 4.21.
(2) Whether the amount collected by the assessee is as per rules laid down and as per the Consensual Agreement entered into with the Government of Karnataka and Consortium of Private professional institutions.
(3) Whether the assessee can be alleged to be collecting capitation fee on account of the fee that the assessee is collecting certain amount over and above the tuition fee.
(4) Whether there is any surplus arising to the assessee on account of the activity of running of educational institutions and if so, whether this surplus is within the permissible limits laid down by the Hon'ble Supreme Court.
(5) If, there is any surplus arising from the activities of the running of educational institutions whether that surplus is substantial or within reasonable limits.
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As far as the issue whether the Assessee violated the provisions of Karnataka Educational Institutions (Prohibition of Capitation Fees) Act of 1984 by which collection of capitation fee is prohibited, the relevant provisions in the said Act are Section 3 to 5 of that Act. As per the provisions of Sec.3 of that Act provides that no capitation fee shall be collected by or on behalf of any educational institution or by any person who is in charge of or is responsible for the management of such institution. The proviso to the said section lays down that capitation fee or cash deposits may be collected as per rules or orders that Government may issue from time to time. Section 4(2) of that provides that in order to regulate the capitation fee charged or collected during the period specified under the proviso to section 3, the Government may, from time to time, by general or special order, specify in respect of each private educational institution or class or classes of such institutions,
(a) the number of seats set apart as Government seats;
(b) the number of seats that may be filled up by the management of such institution,-
(i) from among Karnataka students on the basis of merit, on payment of such cash deposits refundable after such number of years, with or without interest as may be specified therein, but without the payment of capitation fee ; or
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(ii) at its discretion
Section 5 of that Act also lays down that no educational institution shall collect any fees or amount or accept deposits in excess of the amounts notified under sub-section (1) or permitted under the proviso to section 3. Section 2(b) of that Act also defines, "capitation fee' to mean any amount, by whatever name called, paid or collected directly or indirectly in excess of the fee prescribed under section 5, but does not include the deposit specified under the proviso to section 3. In exercise of powers provided by the provisions of Sec.5 of that Act, Government may by 'notification, to regulate the tuition fee or any other fee or deposit or other amount that may be received or collected by any educational institution or class of such institutions in respect of any or all class or classes of students. In pursuance of this, the Karnataka Government passed Act 8 of 2006 titled as THE KARNATAKA PROFESSIONAL EDUCATIONAL INSTITUTIONS (REGULATION OF ADMISSION AND DETERMINATION OF FEE) ACT, 2006. This Act at Section 7 deals with the Fee Determination by a Fee Regulatory Committee constituted under this Act. The CIT(A) found that In the case of the assessee, the A.O has himself recorded at para 4.32 of the assessment order that the assessee was lawfully collecting fee and no conclusion was arrived at by the AO to the effect that
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the assesseee was collecting any Development fund or building fund. From annexures which were provided by the Assessee before CIT(A), the CIT(A) found that the assessee was collecting university fee amounting in Rs.6,400 and Rs.27,960 splitting various fee as mentioned in the Annexure. This amount also consisted of refundable deposit of Rs.8,000 consisting of Rs.5,000 towards college deposit and Rs.3,000 towards library deposit. All other items which were mentioned in the fee structure were towards the supply of uniform and towards utilisation of various facilities available in the institutions. It was also submitted by the assessee that these amounts were mentioned in the fee receipt itself and were known to every student who was admitted and did not vary from one student to another student in the same branch. The CIT(A) found that the University fee collected by the Assessee was the fee payable to the University by the Student and was allowed as per the provisions of Section 2 of the ACT 8 of 2006. The Other amounts were expenses for providing facilities to the students by way of Uniform, Identity card etc., and therefore cannot be considered as Capitation fee. The refundable Deposits were to be returned when the course is completed and hence cannot be treated as Capitation fee. The CIT(A) was of the view that tested against the definition provided by the Act of 1984, the tuition fee collected by the
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assesee compared with the tuition fee prescribed by the Consensual Agreement entered into in respect of the assessment year under consideration, was in keeping with the fee structure decided by the Consensual Agreement in relation to the tuition fee in respect of students admitted under CET and COMED-K category. As per the Consensual Agreement, the tuition fees in respect of management quota is not fixed and it is mentioned in the agreement that each institution is required to notify the upper limit of the fee payable and shall not collect anything more than that of the tuition fee. Since there is no limit fixed by the Consensual Agreement in respect of NRI students and management quota, the assessee had fixed the fee and this amount which fixed was communicated well in advance and it was the same for all the students and there was no variation. The CIT(A) held that the conclusion drawn by the AO at para 4.21 of the assessment order that the assesee has violated the provisions of Karnataka Act in relation of prohibition of capitation fee was incorrect.
On the issue whether the fee collected by the Assessee was in accordance with the Consensual Agreement, the CIT(A) found the following factual position.
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He found that the Assessee had duly intimated fee to be collected for each of the courses as per the procedure prescribed in the relevant statutory provisions. There was therefore no violation in the matter of collection of fees by the Assessee.
On the question whether the Assessee was collecting capitation fee, the CIT(A) found that the assessee was not collecting any capitation.
On the question whether the activities of the Assessee resulted in any surplus, the CIT(A) examined the stream of income of the Assessee and expenditure and found that income stream of the Assessee was fee receipts and other income. The Other Income consisted of statement consists of fee receipts and other income. The Other Income consisted of Interest on Deposits held with banks, Rental Income received on account of letting out of premises to Vijaya Bank, Cafetaria and for an ATM and Hospital receipts on account of Insurance claims settled. In addition, Other Income also Included TDS made in earlier years by various payers for which claim of refund was
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made in the returns filed. Over and above the incomes stated above, other Income also included the following heads.
The CIT(A) found that income forming part of Other income cannot be considered to be receipts arising from the Running of Educational Institution, though some of them may be incidental receipts. He also
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found from examination of the Balance Sheet that the assesse had substantial deposits in bank and other income is related to the interest income earned from the deposits held by the assessee on which TDS and hence, cannot be considered to be earned out of the activity of the educational institutions. He held that Interest income from the deposits were to be considered as income arising from the activity of running educational institution. Similarly, he held that Rental Income cannot be considered to have arisen from the activity of running the Educational Institution. After excluding the aforesaid items of income, the CIT(A) computed the net surpls was deficit because Fees Receipts were Rs.1,075,948,012 whereas the Amount spent for activities of the trust was Rs. 1,272,227,302. The CIT(A) therefore concluded that there was no net surplus arising from activities of the educational institution.
For the above reasons the CIT(A) came to the conclusion that there was no basis for the AO to have denied the benefit of exemption to the Assessee u/s.11 of the Act.
17.The order of Assessment and order of CIT(A) is identical for AY 2013- 14 & 2014-15. Aggrieved by the order of the CIT(A), the revenue has preferred the present appeals before the Tribunal.
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We have heard the rival submissions. The ld. DR reiterated the stand of the Revenue as reflected in the grounds of appeal filed before the Tribunal. The ld counsel for the assesee reiterated the stand taken by the assessee for the CIT(A) and relied on the order of the CIT(A).
We have given a careful consideration to the rival submissions. In Gr.No.2 raised by the revenue, it has been contended that the assessee is not eligible for exemption u/s 11 and 12 of the I.T. Act, 1961, because the assessee trust has collected more than the fee declared or notified in respect of NRI/NRI sponsored and others quota i.e., Management quota in the garb of voluntary contributions/corpus fund and this fact of collecting more than the fee notified has been proved without any dispute in as much as the assessee itself furnished the details. The Karnataka Educational Institutions (Prohibition of Capitation Fees) Act of 1984 (herein after called the state Act) provides that no educational institution offering professional courses shall collect any amount in the way of capitation fee. Educational institutions are however free to collect a fee and collection of fee is regulated by the State Government in pursuance of the State Act. The Govt. of Karnataka has passed the Karnataka Professional Educational Institutions (Regulation of Admission and Determination of fee) Act 2006 (hereinafter referred as Determination of fee Act). As per the provisions of determination of fee Act, there is a fee Regulatory Committee which determines the fee to be charged by private aided or un-aided professional educational institution affiliated to a university. As per sec. 7(3) proviso to the determination of fee Act, Fee
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Regulatory Committee may allow professional educational institution to collect a higher rate of fee from non-resident Indian student for admission.
It is not in dispute that as per the provisions of the determination of fees Act, a consensual agreement was entered into between Govt. of Karnataka and the Karnataka Pvt. Medical, Dental and Engineering College Association. The consensual agreement does not make any reference to about other expenses which the institution may recover from the students who are admitted. Capitation fee is defined as amount collected for the purpose of giving admission.
It is clear from the order of the AO that the complaint of the AO was that the assessee was collecting fees much more than what was agreed in terms of consensual agreement. It is also clear from the details furnished by the assessee before the CIT(A) that the assessee has in fact not collected amounts in excess of the limits agreed under the consensual agreement. The tuition fee collected by the assesee compared with the tuition fee prescribed by the Consensual Agreement entered into in respect of the assessment year under consideration, was in keeping with the fee structure decided by the Consensual Agreement in relation to the tuition fee in respect of students admitted under CET and COMED-K category. As per the Consensual Agreement, the tuition fees in respect of management quota is not fixed and it is mentioned in the agreement that each institution is required to notify the upper limit of the fee payable and shall not collect anything more than that of the tuition fee. Since there is no limit fixed by the Consensual Agreement
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in respect of NRI students and management quota, the assessee had fixed the fee and this amount which fixed was communicated well in advance and it was the same for all the students and there was no variation.
It is clear from the details furnished by the assessee that no capitation fee was collected and further accepted in management quota where there is no fees fixed by consensual agreement fees collected by the assessee was in accordance with the collection of Act. In the above circumstances CIT(A) was right in coming to the conclusion that the tuition fee collected by the assesse was in accordance with the consensual agreement in collection of tuition fees and there is no violation of the relevant provisions of law. It is also clear from the findings of the CIT(A) that the assesee has not been collecting any fees at the time of admission (copy) which is necessary to call fee collected is computation fees that which collected at the time of admission. Even Gr.No.2 of the revenue proceeds on the footing that the tuition fee collected was in reality a capitation fee. We are of the view that the findings of the CIT(A) on this issue are correct and does not call for any interference.
As far as Gr.No.3 & 4 raised by the revenue are concerned, the same relates to the complaint of the AO that the Assessee has been generating surplus over a period of time and therefore as per the decision rendered by the Hon’ble Supreme Court in the case of M/S.Visvesvaraya Technological University (supra), the Assessee should be deemed to be existing for purpose of profit and not for carrying on charitable activity of providing education.
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The chart prepared by the AO in this regard is already reproduced in the grounds of appeal filed by the Revenue. The decision of the Hon’ble Karnataka High Court was subject matter of appeal before the Hon’ble Supreme Court and the decision of Hon’ble Supreme Court reported in 384 ITR 37. The question before the High Court and the Supreme Court in the case of Vishweshwaraiah Institute of Technology University (supra) was in the context of allowabity of exemption u/s 10(23)(iiab) of the Act. The Visvesvraya Technological University (VTU) was constituted under the Visveswaraiah Technological University Act, 1994. It discharged functions earlier performed by the Department of Technical Education, Government of Karnataka. The University exercises control over all Government and Private Engineering Colleges within Karnataka. The University claimed exemption under Section 10(23C)(iiiab) of the Act on the ground that it is solely for the purpose of education and without any profit motive and it is wholly or substantially financed by the government. The Karnataka High Court (in the judgment reported in (2014) 362 ITR 279 (Kar)) rejected the claim inter alia on the ground that an institution which regularly makes more than 10% – 15% surplus is existing for profit & is not eligible for exemption. On appeal by the University to the Supreme Court HELD:
(i) The entitlement for exemption under Section 10(23C) (iiiab) is subject to two conditions. Firstly the educational institution or the university must be solely for the purpose of education and without any profit motive. Secondly, it must be wholly or substantially financed by the government. Both conditions will have to be satisfied before exemption can be granted under the aforesaid provision of the Act.
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(ii) The relevant principles of law which will govern the first issue i.e. whether an educational institution or a university, as may be, exists only for educational purpose and not for profit are no longer res integra, having been dealt with by a long line of decisions of this Court which have been elaborately noticed and extracted in a recent pronouncement i.e. Queen’s Educational Society vs. Commissioner of Income Tax (2015) 8 SCC 47. To the above principles, one further test as laid down in CIT vs. Surat Art Silk Cloth Manufacturers’ Assn (1980) 2 SCC 31 and culled out in American Hotel and Lodging Association Educational Institute vs. Central Board of Direct Taxes and Others (2008)10 SCC 509 may be added which is as follows: “In order to ascertain whether the institute is carried on with the object of making profit or not it is the duty of the prescribed authority to ascertain whether the balance of income is applied wholly and exclusively to the objects for which the applicant is established.” The above principle has been specifically reiterated in paragraph 19 of the decision in Queen’s Educational Society (supra) in the following terms: “The final conclusion that if a surplus is made by an educational society and ploughed back to construct its own premises would fall out of Section 10(23-C) is to ignore the language of the section and to ignore the tests laid down in Surat Art Silk Cloth case [CIT v. Surat Art Silk Cloth Manufacturers’ Assn.(1980) 2 SCC 31], Aditanar case [Aditanar Educational Institution v. CIT [(1997) 3 SCC 346] and American Hotel & Lodging case [American Hotel & Lodging Assn. Educational Institute v. CBDT [(2008) 10 SCC 509].
(iii) It is clear that when a surplus is ploughed back for educational purposes, the educational institution exists solely for educational purposes and not for purposes of profit.”
(iv) In the present case, we find that during a short period of a decade i.e. from the year 1999 to 2010 the University had generated a surplus
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of about Rs.500 crores. There is no doubt that the huge surplus has been collected/accumulated by realizing fees under different heads in consonance with the powers vested in the University under Section 23 of the VTU Act. The difference between the fees collected and the actual expenditure incurred for the purposes for which fees were collected is significant. In fact the expenditure incurred represents only a minuscule part of the fees collected. No remission, rebate or concession in the amount of fees charged under the different heads for the next Academic Year(s) had been granted to the students. The surplus generated is far in excess of what has been held by this Court to be permissible (6 to 15%) in Islamic Academy of Education and another vs. State of Karnataka and others (2003) 6 SCC 697 (paragraph 156) though the percentage of surplus in Islamic Academy of Education (supra) was in the context of the determination of the reasonable fees to be charged by private educational bodies.
(v) Universities and Educational Institutions entitled to exemption under the Act have been categorized under three different heads, namely, those covered by Section 10(23C) (iiiab); Section 10(23C)(iiiad) and 10(23C)(vi) of the Act. The requirement of the University or the educational institution existing “solely for educational purposes and not for purposes of profit” is the consistent requirement under Section 10(23C) (iiiab), 10(23C)(iiiad) and 10(23C)(vi). However, in cases of Universities covered by Section 10(23C)(iiiab) funding must be wholly or substantially by the Government whereas in cases of universities covered by Section 10(23C)(iiiad) the aggregate annual receipts should not exceed the amount as may be prescribed. Universities covered by Section 10(23C)(vi) are those other than mentioned in sub-clause (iiiab) or sub- clause (iiiad) and which are required to be specifically approved by the prescribed authority.
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(vi) Having regard to the text and the context of the provisions of Section 10 (23c) (iiiab), 10 (23c) (iiiad) and 10 (23c) (vi) it will be reasonable to reach a conclusion that while Section 10 (23c) (iiiab) deals with Government Universities, Section 10 (23c) (iiiad) deals with small Universities having an annual “turnover” of less than Rupees One Crore (as prescribed by Rule 2 (BC) of the Income Tax Rules). On a similar note, it is possible to read Section 10 (23c) (vi) to be dealing with Private Universities whose gross receipts exceeds Rupees One Crore. Receipts by way of fee collection of different kinds continue to a major source of income for all Universities including Private Universities. Levy and collection of fees is invariably an exercise under the provisions of the Statute constituting the University. In such a situation, if collection of fees is to be understood to be amounting to funding by the Government merely because collection of such fees is empowered by the Statute, all such receipts by way of fees may become eligible to claim exemption under Section 10 (23c) (iiiab). Such a result which would virtually render the provisions of the other two Sub-sections nugatory cannot be understood to have been intended by the Legislature and must, therefore, be avoided.
(vii) It will, therefore, be more appropriate to hold that funds received from the Government contemplated under Section 10(23c)(iiiab) of the Act must be direct grants/contributions from governmental sources and not fees collected under the statute. The view of the Delhi High Court in Mother Diary Fruit & Vegetable Private Limited vs. Hatim Ali & Anr [(2015) 217 DLT 470] which had been brought to the notice of the Court has to be understood in the context of the definition of ‘public authority’ as specified in Section 2(h)(d)(ii) of the Right to Information Act, 2005. Reliance has been placed on the judgment of the High Court of Karnataka in Commissioner of Income-tax, Bangalore vs. Indian Institute of Management (2014) 49 Taxmann.com 136 (Karnataka). The situation before us, on facts, is different leading to the irresistible
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conclusion that the University does not satisfy the second requirement spelt out by Section 10 (23c) (iiiab) of the Act. The appellant University is neither directly nor even substantially financed by the Government so as to be entitled to exemption from payment of tax under the Act.
The Hon’ble Supreme Court in the case of Queens Educational Society 372 ITR 699 (SC) summed up the law common to Section 10(23C) (iiiad) and (vi) as follows:
• Where an educational institution carries on the activity of education primarily for educating persons, the fact that it makes a surplus does not lead to the conclusion that it ceases to exist solely for educational purposes and becomes an institution for the purpose of making profit. • The predominant object test must be applied – the purpose of education should not be submerged by a profit making motive. • A distinction must be drawn between the making of a surplus and an institution being carried on “for profit”. No inference arises that merely because imparting education results in making a profit, it becomes an activity for profit. • If after meeting expenditure, a surplus arises incidentally from the activity carried on by the educational institution, it will not be cease to be one existing solely for educational purposes. • The ultimate test is whether on an overall view of the matter in the concerned assessment year the object is to make profit as opposed to educating persons. If a surplus is made by an educational society and ploughed back to construct its own premises would fall foul of Section 10(23C) is to ignore the language of the Section and to ignore the tests laid down in the Surat Art Silk Cloth case, Aditanar Educational Institution vs Addl.Commissioner of Income Tax case and the American Hotel and Lodging case. It is clear that when a surplus is ploughed back for educational purposes, the educational institution exists solely for educational purposes and not for purposes of profit.
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On the facts and circumstances of the case, the assessee has not generated surplus which increased from year to year as contended in the grounds of appeal by the Revenue and by the AO in the order of assessment. The Assessing Officer while computing the surplus has taken into account the Income and Expenditure Account filed by the Assessee. He ought to have taken the Statement of Computation of Income made by the Respondent Trust for the purpose of claiming exemption u/s 11. As per the computation of income furnished along with the Return of Income, there is deficit of Rs.3,98,76,721/- for the assessment year 2012-13 after applying the provisions of Income-tax Act as per sections 11 and 12. Therefore, there is no surplus at all which could be considered by the Assessing Officer to deny exemption u/s. 11. Similarly, for the earlier years also, there was no surplus but there were excess of expenditure over income as tabulated below:-
The position in assessment year 2013-14 and 2014-15 is also identical as per the following details :-
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It is also pertinent to mention that CBDT Circular No.14/Bang/2015 dated 17/8/2015 has given guidelines regarding generation of surplus out of gross receipts. This Circular was issued in the context of provision of sec. 10(23C)(vi) of the Act. The CBDT has opined that mere generation of surplus by educational institution cannot be basis to reject application u/s 10(23C)(vi) fee surplus for educational purpose. The accumulation however should not be contrary to the manner prescribed under law. Perusal of the order of the AO shows that except for making allegation that the assesee has been generating the surplus which is increasing over the period of time.
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There is no allegation or material brought on record by the AO that the surplus generated and that accumulated is contrary to any provision of the Act and nor is there an allegation that surplus has not been used for the purpose of education. In this context it is also relevant to mention that the AO has spelt out as to how the accumulation is contrary to provision of the Act. The surplus generated by the assessee and its utilization is in accordance with law and the allegations of the AO to the contrary was rightly held to be not correct by the CIT(A). We, therefore upheld the order of the CIT(A) and dismissed the appeal of the Revenue.
As far as cross-objection of the assessee is concerned the first ground raised in the cross-objection is with regard to the orders of asst. being barred by limitation. This issue is applicable only in asst. year 2012-13. It is seen from the order of the CIT(A) that this grievance of the assesee projected before the CIT(A) was that though the order of the AO is dated 31/3/2015 since the same was dispatched by the AO by post after the period of limitation, the date of dispatch should be considered as the date of the passing of the order by AO and in that event order of the AO is passed beyond period of limitation prescribed in law. We however find that the assesee has given up this ground before the CIT(A) and therefore we are of the view that this ground of appeal does not arise out of the order of the CIT(A) and therefore does not require any adjudication.
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The other grounds of cross objection for asst. year 2012-13 are with regard to the grievance of the assessee that the Addl. CIT did not have jurisdictional to pass the impugned order. The CIT(A) on this aspect held that the additional CIT had concurrent jurisdiction. Th e grievance projected in the cross objection by the Assessee on this aspect is that notification conferring concurrent jurisdiction on the additional CIT was not furnished to the assessee. In our view this will not make the order of assessment invalid. We, therefore find no merits in this ground raised by the assessee in the cross-objection for asst. 2012-13 and hence it is dismissed.
The next common grievance of the assessee projected in asst. years 2012-13 to 2014-15 is with regard to the denial of depreciation to the assessee on the ground that the cost of acquisition of the asset on which depreciation was claimed by the assessee was already allowed as a deduction by the AO in the year of acquisition. According to the Revenue allowing depreciation would be conferring dual benefit on the assessee i.e firstly treating the cost of acquisition of the capital asset as application of income for charitable purposes and secondly allowing depreciation on the same asset. On this aspect, we find that the issue is no longer res integra. The case of the revenue is that where capital expenditure on acquisition of depreciable asset is considered as application of income for charitable purpose, allowing depreciation on
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the very same capital asset would not amount to double allowance. The revenue places reliance on judgment of Hon’ble Supreme Court in the case of Escorts Limited & another Vs. Union of India 199 ITR 43(SC). The assessee pointed out that Hon'ble High Court of Karnataka in the case of All Saints Church, 148 ITR 786 (Kar) and Society of Sisters of St. Ann, 146 ITR 28 (Kar) has taken the view that where capital expenditure on acquisition of depreciable asset is considered as application of income for charitable purpose, allowing depreciation on the very same capital asset would not amount to double allowance. The assessee also pointed out that the decision of Escorts Ltd. (supra) will not be applicable as it was rendered on a different set of facts. The AO however, held that allowance of depreciation when the cost has already been recovered by way of exemption as application of income amounts to double deduction and double benefit on the same asset. The AO referred to the decision of the of Hon'ble High Court of Kerala in the case of DDIT(E) v. Lissie Medical Institutions, 348 ITR 344 (Ker) wherein it was held that allowing depreciation of a depreciable asset when the cost of acquisition of depreciable asset was allowed as application of income for charitable purpose amounts to double depreciation and therefore depreciation cannot be allowed. The AO also distinguished the cases cited by the Assessee. On appeal by the Assessee, the CIT(A), confirmed the order of the AO.
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The Hon’ble Karnataka High Court in St. Ann’s Convent 349 ITR 559 (Karn) and Dr.T.M.A. Pai Foundation, Manipal in ITA No. 481 to 485/Bang/2009 dated 16.2.2010, held that the claim of the Assessee for depreciation has to be allowed. Identical issue came up for consideration before ITAT Bangalore Bench in the case of DDIT(E) v. Cutchi Memon Union (2013) 60 SOT 260 Bangalore ITAT, wherein similar issue has been dealt with by this Tribunal. In the aforesaid case, the assessee claimed depreciation and the AO denied depreciation on the ground that at the time of acquiring the relevant capital asset, cost of acquisition was considered as application of income in the year of its acquisition. The AO took the view that allowing depreciation would amount to allowing double deduction and placed reliance on the decision of Hon'ble Supreme Court in Escorts Ltd. (supra). The CIT(A), however, allowed the claim of assessee. On further appeal by the Revenue, the Tribunal held as follows:- “20. We have considered the rival submissions. If depreciation is not allowed as a necessary deduction for computing income of charitable institutions, then there is no way to preserve the corpus of the trust for deriving the income as it is nothing but a decrease in the value of property through wear, deterioration, or obsolescence. Since income for the purposes of section 11(1) has to be computed in normal commercial manner, the amount of depreciation debited in the books is deductible while computing such income. It was so held by the Hon’ble Karnataka High Court in the case of CIT Vs. Society of Sisters of St. Anne 146 ITR 28 (Kar). It was held in CIT vs. Tiny Tots Education Society (2011) 330 ITR 21 (P&H), following CIT vs. Market Committee, Pipli (2011) 330 ITR 16 (P&H) :
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(2011) 238 CTR (P&H) 103 that depreciation can be claimed by a charitable institution in determining percentage of funds applied for the purpose of charitable objects. Claim for depreciation will not amount to double benefit. The decision of the Hon’ble Supreme Court in the case of Escorts Ltd. 199 ITR 43 (SC) have been referred to and distinguished by the Hon’ble Court in the aforesaid decisions. 21. The issue raised by the revenue in the ground of appeal is thus no longer res integra and has been decided by the Hon’ble Punjab & Haryana High Court in the case of CIT v. Market Committee, Pipli, 330 ITR 16 (P&H). The Hon’ble Punjab & Haryana High Court after considering several decisions on that issue and also the decision of the Hon’ble Supreme Court in the case of Escorts Ltd. (supra), came to the conclusion that depreciation is allowable on capital assets on the income of the charitable trust for determining the quantum of funds which have to be applied for the purpose of trusts in terms of section 11 of the Act. The Hon’ble Punjab & Haryana High Court made a reference to the decision of the Hon’ble Supreme Court in the case of Escorts Ltd. (supra) and observed that the Hon’ble Supreme Court was dealing with a case of two deductions under different provisions of the Act, one u/s. 32 for depreciation and the other on account of expenditure of a capital nature incurred on scientific research u/s. 35(1)(iv) of the Act. The Hon’ble Court thereafter held that a trust claiming depreciation cannot be equated with a claim for double deduction. The Hon’ble Punjab & Haryana High Court has also made a reference to the decision of the Hon'ble Karnataka High Court in the case of CIT v. Society of Sisters of Anne, 146 ITR 28 (Kar), wherein it was held that u/s. 11(1) of the Act, income has to be computed in normal commercial manner and the amount of depreciation debited in the books is deductible while computing such income. In view of the aforesaid decision on
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the issue, we are of the view that the order of the CIT(A) on the above issue does not call for any interference. 22. Consequently, ground No.5 raised by the revenue is dismissed.” 31. We may also add that the legal position has since been amended by a prospective amendment by the Finance (No.2) Act, 2014 w.e.f. 1.4.2015 by insertion of sub-section (6) to section 11 of the Act, which reads as under:-
“(6) In this section where any income is required to be applied or accumulated or set apart for application, then, for such purposes the income shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under this section in the same or any other previous year.” 10. As already stated, the aforesaid amendment is prospective and will apply only from A.Y. 2015-16. In view of the above legal position, we are of the view that the order of the CIT(A) does not call for any interference. Consequently, the issue raised by the Revenue in this regard is without any merit and the same is dismissed.
In asst. years 2013-14 and 2014-15, the assesee did not make a claim of depreciation in the original return of income but made a claim before the AO for allowing claim of depreciation by following the revised computation of total income and the CIT(A) placed reliance on the decision of Hon’ble Supreme Court in the case of Goetze India Ltd,
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284 ITR 323 (SC) which lays down that the claim which is not made by filing revised return of income before the AO cannot be entertained by the AO. On this aspect we find that the aforesaid decision of the Hon’ble Supreme Court has been interpreted in the decisions rendered by Hon’ble High Courts not to exceed the power of the Tribunal nor the first appellate authority viz., the Hon’ble Delhi High Court in the case of JE Parolics 306 ITR 42 Delhi and Delhi High Court in the case of Bharat Aluminum 163 Taxmann 430. In the light of the aforesaid decisions, we are of the view that the CIT(A) ought to have examined the claim of the assessee and this action in interfering with the claim was not justified.
The next common ground raised by the assessee in the Cross- objection for asst. year 2012-13 to 2014-15 is with regard to the disallowance of expenses incurred outside India to attend seminars etc., This expenditure was incurred to enrich the knowledge and contribution towards the growth and development of students. It is the case of the Revenue that the exemption u/s 11 can be allowed only if the charitable activity is performed in India and since the expenses in question were incurred for travel outside India, the amount should be considered as having been spent outside India and therefore not eligible for exemption u/s 11 of the Act.
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On this aspect, we find that in the case of M/s Foundation for Indian Sporting Talent (FIST) in ITA No.1665 & 1666/Bang/2017 dated covered by the decision of Hon’ble Delhi High Court, paras 21 to 24 reads as under:-
“21. We have heard the rival submissions. Identical issue was considered by the Hon’ble Delhi High Court in the case of CIT v. Associated Chambers of Commerce & Industry of India, ITA No.343/2016¸ judgment dated 24.05.2016. In the aforesaid decision, the Hon’ble Delhi High Court upheld the order of the Tribunal that sending delegates to foreign countries cannot be held as outside the main objects of the assessee. Therefore, exemption cannot be denied on the ground that expenses were incurred outside India. 22. The ld. DR, however, placed reliance on the decision of the Hon’ble Delhi High Court in the case of CIT v. National Association of Software & Services Companies, 345 ITR 362 (Del), wherein a contrary view was taken. 23. The ld. counsel for the assessee brought to our notice the decision of the ITAT Delhi Tribunal rendered in the case of DDIT v. Associated Chamber of Commerce & Industry of India, ITA No.6525/Del/2013, order dated 31,97,2915 wherein the decision cited by the ld. DR in the case of CIT v. National Association of Software & Services Companies, 345 ITR 362 (Del),was also considered and the Tribunal following the decision of the Hon’ble Supreme Court in the case of H.E.H. Nizam’s Religious Endowment Trust v. CIT, 59 ITR 582, held as follows:-
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“7. On vigilant perusal of the judgment of Hon’ble Supreme Court in the case of H.E.H. Nizam's Religious Endowment Trust vs. Commissioner of Income Tax (supra), we are in agreement with the contention of the ld. Counsel of the assessee that the facts of the present case are distinguishable from that case. On careful reading of said judgment of Hon’ble Supreme Court, it is amply clear that in that case, the assessee Nizam’s Trust was denied exemption in regard to the application of income from property as per second part of clause (i) of section 4(3) of the Income Tax Act 1922 (as applicable at that time) which were applied or finally set apart for religious or charitable purposes outside taxable territories. In the present case, it is not the case of the revenue that the assessee association applied its income or receipts outside taxable territories because the issue before us only relates to expense towards foreign travelling of delegation sent by the assessee association for the purposes of promotion of trade and industry in India which is the main object of the assessee association. In view of above, we respectfully hold that the benefit of the ratio of the said decision of Hon’ble Supreme Court in the case of H.E.H. Nizam's Religious Endowment Trust vs. Commissioner of Income Tax (supra) is not available for the revenue as the facts and circumstances of the present case are distinguishable from that case. 8. Undisputedly and admittedly, the main objective of the assessee association is to promote trade and industry in India that in the present era of economic globalization, sending delegation to foreign countries cannot be held as outside the ambit of main objective of
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the assessee association. Per contra, from the Article of Association available at page 3 to 38 of the assessee’s paper book, it is vivid that the main objects as contained in clause (3) of the Memorandum of Association, objectives cannot be fulfilled without sending foreign delegation and, therefore, foreign travelling expenses incurred by the assessee cannot be held as application of income outside taxable territories of the assessee. Therefore, we are inclined to agree with the conclusion of the CIT(A) and we are unable to see any infirmity, perversity or any other valid reason to interfere with the same. Accordingly, ground no. 1 and 2 of the revenue being devoid or merits are dismissed.” 24. In the light of the aforesaid decision of the Tribunal which was confirmed by the Hon’ble Delhi High Court, we are of the view that the expenses incurred in foreign currency has to be considered as application for charitable purpose and incurred for the charitable purposes in India. We hold accordingly.
In the light of the above decision, we are of the view that the assessee is entitled to deduction of expenses incurred on travel outside India by its lecturers and in the facts and circumstances of the case, the same is directed to be allowed.
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In the result, appeal of the Revenue is dismissed while cross objection by the Assessee is allowed.
Pronounced in the open court on 15th February, 2019.
Sd/- Sd/- ( JASON P BOAZ) ( N.V. VASUDEVAN) Accountant Member Vice President
Bangalore, Dated, 15th February, 2019. / vms / Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order
Asst. Registrar, ITAT, Bangalore.
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* 1. Date of Dictation ………………………………… 2. Date on which the typed draft is placed before the dictating Member ……………………. 3. Date on which the approved draft comes to Sr.P.S .……………………………. 4. Date on which the fair order is placed before the dictating Member ……………….. 5. Date on which the fair order comes back to the Sr. P.S. ………………….. 6. Date of uploading the order on website…………………………….. 7. If not uploaded, furnish the reason for doing so ………………………….. 8. Date on which the file goes to the Bench Clerk ………………….. 9. Date on which order goes for Xerox & endorsement…………………………………… 10. Date on which the file goes to the Head Clerk ……………………. 11. The date on which the file goes to the Assistant Registrar for signature on the order ………………………………. 12. The date on which the file goes to dispatch section for dispatch of the Tribunal Order …………………………. 13. Date of Despatch of Order. ……………………………………………..