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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI SUNIL KUMAR YADAV & SHRI INTURI RAMA RAO
Per Sunil Kumar Yadav, Judicial Member
These appeals are preferred by the Revenue as well as the assessee against the respective orders of the CIT(Appeals). Since the issues involved in these appeals are almost common, we heard the appeals together and as such these are being disposed of through this consolidated order. are the Revenue’s appeals in which the order of CIT(Appeals) is assailed by the Revenue on the solitary ground that the CIT(Appeals) has erred in holding that the assessee is engaged in charitable activities by imparting education, having ignored the facts that the capitation fee/donations were collected by the assessee trust from the parents of students over and above the regular fees in violation of Karnataka Educational Institutions (Prohibition of Capitation Fee) Act, 1984. However, for the sake of reference, we extract the grounds in hereunder:-
“i) The order of the CIT(A) on the issue of capitation fee / donations collected by the assessee trust over and above the regular tuition fee and violation of Karnataka Educational Institution Prohibition of Capitation Fee Act, 1984, cannot be accepted for the reason that, the assessee is basically an entity existing for charitable purposes and imparting education, being an object of the trust, should not indulge in collecting hefty money in the form of donations, for which, as brought out by the AO in the assessment order, parents were forced to borrow loans to get their wards admitted to the said college.
& 207/Bang/2014 & 1099/Bang/2015 Page 3 of 31 ii) The opinion of the CIT(A), Mysore that the AO is not the competent authority to hold that the appellant has committed violations is not acceptable for the reason that, the AO is duty bound to look out for any violations committed by the entities claiming exemption and whether the entity is carrying on its activities on charitable footing, before allowing such exemptions claimed, which has been rightly done by the AO after bringing on record the relevant facts after investigation and disallowing the claim of exemption of the assessee trust. iii) The observation of the CIT(A) that so long as the income from the charitable activity, i.e., profits earned from the educational activities is applied for the objects of the trust or society, there is no embargo on the nature of income that feeds the charity except in the case of any activity that falls within the limb "any other object of general public utility", is not acceptable for the reason that, by way of collecting capitation fee in the guise of voluntary contributions from the students over & above the prescribed fees, the society has acted against the objects for which the society is established, viz., helping the backward students from Kamma Community in imparting education and also to help the deserving students by giving free education and scholarships.” is an appeal preferred by the assessee against the order of CIT(Appeals) for the AY 2011-12 on various grounds, but they all relate to denial of exemption u/s. 11 of the Act on account of receipt of capitation fees from the students. We, however, for the sake of reference extract the grounds raised in assessee’s appeal also:-
“1. The orders of the authorities below in so far as they are against the appellant, are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case. 2. The learned CIT[A] has erred in upholding the order of the learned A.O. in denying exemption u/s.11 of the Act, to the appellant under the facts and in the circumstances of the & 207/Bang/2014 & 1099/Bang/2015 Page 4 of 31 appellant's case especially by dissenting from the decision of the predecessor CIT[A] in the appellant's own case and by not following the decision of the jurisdictional High Court in the case of CHILDRENS EDUCATIONAL SOCIETY reported in 358 ITR 395, which ratio has been upheld by implication in the case QUEEN'S EDUCATIONAL SOCIETY reported in 372 ITR 699 in preference to the ratio of the decision of the Hon'ble Uttarakhand High Court in the case of QUEEN'S EDUCATIONAL SOCIETY reported in 319 ITR 160 and in particular by following the decision of the non- jurisdictional ITAT, Hyderabad "B" Bench in the case of VODITHALA EDUCATION SOCIETY reported in 20 SOT 353 in preference to the decision of the jurisdictional Tribunal in the case of CHILDRENS EDUCATION SOCIETY and also the express provisions of section 11[7] of the Act, under the facts and in the circumstances of the appellant's case.
The learned CIT[A] has seriously erred in upholding the order of the learned A.O. that the amounts collected by the appellant trust as voluntary contributions from general public and which are accounted in its own books as "voluntary contributions" in the "Head Office Segment" and in the Income & Expenditure account of the books of accounts of the appellant trust, as fee for granting admissions by the educational institutions run by the appellant trust especially when the books of accounts and the entries made therein are not rejected under the facts and in the circumstances of the appellant's case. 3.1 The finding of the authorities below are purely on suspicion and surmise, assumptions and presumptions and per se perverse as contrary to the evidence especially by relying upon the statements of only 7 persons, which have not been put to the appellant to lead evidence in rebuttal and if found necessary to cross-examine them and thus the finding is vitiated and the addition made and finding rendered on the basis of which denial of exemption u/s.11 of the Act is made are liable to be deleted/vacated.
4. Without prejudice to the above, the learned CIT[A] failed to appreciate that there was no surplus at all with reference to 3 institutions and hospital and there was surplus only with reference to the "head office segment of the appellant trust" and that too such surplus was without reckoning the capital ITA Nos.206 & 207/Bang/2014 & 1099/Bang/2015 Page 5 of 31 expenditure, which was not claimed as an expenditure in the Income & Expenditure account and if they were considered, the surplus earned would be very reasonable and could not be considered as any income derived by exploiting the education as a means to achieve the objects as alleged by the learned authorities below. 4.1 The finding of the authorities below is purely on suspicion and surmise, assumptions and presumptions and in gross violation of the principles of natural justice and liable to be vacated.
5. The learned CIT[A] erred in holding that the appellant has not lead any evidence to counter to the observation of the learned A.O. for having relied on the evidence on 7 persons without appreciating that it was elementary principle of jurisprudence that the person should know what the accusation he had to face and the evidence on the basis of which such accusation was made to study the same and cross-examine the same having regard to the ratio of the decision of the Hon'ble Supreme Court in the case of MEENGLAS TEA ESTATE v. THE WORKMEN reported in 1963 AIR 1719 [SC] consequently, the evidence relied upon by the learned A.O. to render such finding was in violation of the principles of natural justice consequently, such finding on the basis of which the exemption u/s.11 was denied required to be vacated having regard to the ratio of the decision of the Hon'ble ITAT in the case of COLONISERS reported in 41 ITD 57 and unreported decision of the Hon'ble Bombay High Court RW PROMOTIONS P. LTD., in of 2013 dated 13/0712015.
6. The learned CIT[A] failed to appreciate having regard to the decision of the jurisdictional High Court in the case of CHILDRENS' EDUCATION SOCIETY [supra] and also decision of the Hon'ble Supreme Court in the case of PINE GROVE INTERNATIONAL CHARITABLE TRUST [372 ITR 699], in which the Hon'ble Supreme Court has upheld that the surplus earned on account of running the educational institutions would not be impressed such educational activity by virtue of resultant surplus year after year as non-charitable activity on account of profit motive for being exempt u/s.10[23C] as well as u/s.11 and balance in view of the express provisions of section 11 [7] of the Act, which was not so exempt was entitled for ITA Nos.206 & 207/Bang/2014 & 1099/Bang/2015 Page 6 of 31 exemption u/s. 11[1] of the Act, as per the ratio of the decision of the jurisdictional ITAT in the case of CHILDRENS EDUCATION SOCIETY in & 1554/Bang/2012 dated 30105/2015 contrary to the non-jurisdictional Tribunal, Hyderabad "B" Bench in the case of Vodithala Education Society [supra], which is not binding on the learned CIT[A].
Without prejudice to the right to seek waiver with the Hon'ble CCIT/DG, the appellant denies itself liable to be charged to interest u/s 234-B of the Act, which under the facts and in the circumstances of the appellant's case deserves to be cancelled especially, there was no obligation to file an estimate and pay advance-tax and therefore, the interest charged u/s.234B of the Act requires to be cancelled.
8. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs for not following the binding jurisdictional High Court in the case of CHILDRENS EDUCATION SOCIETY.”
Hence, in both the appeals the issue involved is, whether receipt of capitation fees or donations by the assessee in violation of the Karnataka Educational Institutions (Prohibition of Capitation Fee) Act, 1984, from the students/parents of the students disentitle the assessee to claim exemption u/s. 11 of the Act.
5. The initial assessment years are AYs 2009-10 and 2010-11 in which the AO has denied the exemption u/s. 11 of the Act on receipts of letting out of Kalyana Mantap for marriage purposes and the receipts of capitation fees from various students over and above the tuition fees. Besides, denying the exemption u/s. 11 of the Act, the AO had also made a reference to the CIT for cancellation of the registration granted u/s. 12AA of the Act.
Aggrieved, the assessee had preferred appeal before the CIT(Appeals) with the submission that letting out of Kalyana Mantapa for marriage purposes is also one of the objects of the society, therefore this letting out is for charitable purposes.
7. With regard to donations, it was contended that donations were given by the parents of the students towards the corpus, therefore on account of the said donation, the benefit of exemption cannot be denied to the assessee.
The CIT(Appeals) being convinced with the explanation of the assessee has granted exemption to the assessee, having held that letting out of Kalyana Mantap is a part of the charitable activities being one of the objects and receipt of voluntary donations does not disentitle the assessee from claiming the exemption.
The Revenue has challenged this order before the Tribunal with the submission that the AO has made necessary investigation from the parents of the students, who got admission in the relevant assessment years and having made enquiry from the parents, the AO was of the view that most of the parents of the students belonged to a middle class family and were not in a position to part with substantial amount of donation/capitation fees on admission of their children. The ld. DR has also placed reliance upon the judgment of the Hon’ble Madras High Court in the case of P.S.
Govindaswamy Naidu & Sons v. ACIT, 324 ITR 44 (Mad) in which it was held that where it was found that amount paid by the parents of the students admitted to assessee educational institution was not to the corpus donation account, but it was collected only by way of capitation fee, such amount of capitation fee was not exempt in the hands of the assessee- institution.
The ld. DR further invited our attention to the Karnataka Educational Institutions (Prohibition of Capitation Fee) Act, 1984, according to which, “capitation fee” means 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 of the Act. The ld. DR further contended that since the assessee has received the capitation fees over and above the tuition fees, the assessee is not entitled for exemption u/s. 11 of the Act. He also placed reliance upon the judgment of the Hon’ble Apex Court in the case of Ms. Mohini Jain v. State of Karnataka & Ors. (1992) 3 SCC 666, wherein the Hon’ble Supreme Court has held that capitation fee was nothing but price of selling education and such “teaching shops” were contrary to the Constitutional scheme and abhorrent to our Indian culture. Reliance was also placed & 207/Bang/2014 & 1099/Bang/2015 Page 9 of 31 upon the decision of the Hyderabad Tribunal in the case of Vodithala Education Society v. Addl. CIT (Exemption) reported in 20 SOT 353, wherein it was held that the assessee had collected money over and above the prescribed fee by the authority for admission of students and such amount was to be classified as capitation fee and it could be said that assessee’s case was clear case of selling education and it could not be considered as charitable institution u/s. 2(15) of the Act. In the light of these facts, the AO has rightly held the assessee as not a charitable organization u/s. 2(15) of the Act as it was engaged in charging capitation fees.
In the subsequent assessment year i.e., AY 2011-12, for the similar reasons the AO has denied the exemption u/s. 11 of the Act having made more enquiries against which an appeal was filed before the CIT(Appeals) and in this year, the CIT(Appeals) has also concurred with the view of the AO that the assessee was not engaged in charitable activities. While adjudicating the issue, the CIT(Appeals) has also reproduced the details of voluntary contributions received from different parents of the students.
Against this order of the CIT(Appeals), the assessee has preferred an appeal bearing before the Tribunal.
Therefore, the issue before us is, whether the assessee has received the capitation fees from the students for which the benefit of exemption u/s. 11 of the Act can be denied? & 207/Bang/2014 & 1099/Bang/2015 Page 10 of 31 13. The ld. counsel for the assessee in support of his contentions has placed reliance upon the judgments in the case of CIT v. Smt. Shakuntala Devi Khetan, 352 ITR 484 (Mad) and Mahan Marbles Pvt. Ltd., 354 ITR 238 (Raj), but both these judgments are not relevant to the present controversy of the case.
The ld. counsel for the assessee also submitted that while denying the exemption u/s. 11 of the Act in AY 2009-10, the AO has also made a reference to the cancellation of registration u/s. 12AA of the Act. Consequently, registration was cancelled by the CIT, but later on order of the CIT was reversed by the Tribunal, against which an appeal was filed before the Hon’ble High Court of Karnataka and the order of the Tribunal was confirmed and the appeal of the Revenue was dismissed. Therefore, the Tribunal has examined the nature of activities of the assessee while adjudicating the issue of grant of registration. Similar issue cannot be re- examined by the AO for denying the exemption u/s. 11 of the Act. He has also placed reliance upon the following judgments:-
(1) ITO v. Kalinga Cultural Trust, 177 TTJ 233 (Hyd) (2) DIT(E) v. Lala Lajpatrai Memorial Trust, 383 ITR 345 (Bom) (3) CIT v. Karnataka Lingayat Educational Society, Karnataka High Court, Dharwad Bench, dated 15.10.2014. (4) Children’s Education Society, 358 ITR 373 (Kar) (5) K.T. Venkatappa v. K.N. Krishnappa, 173 ITR 678 (Kar) (6) Shri Ananda Marakala, ITAT Bangalore, ITA No. 1584/Bang/2012 & CO 58/Bang/2013 dated 13.9.2013.
& 207/Bang/2014 & 1099/Bang/2015 Page 11 of 31 (7) Colonisers v. ACIT, 41 ITD 57 (Hyd) [SB] (8) Kishinchand Chellaram, 125 ITR 713 (SC)
Having carefully examined the orders of authorities below and documents placed on record, we find that the controversy in these appeals is only with regard to denial of exemption u/s. 11 of the Act on account of receipt of capitation fees by the assessee from the parents of the students who have been admitted during that year. In this regard, we have carefully examined the order of AO and we find that in the AY 2009-10, the AO has made a detailed investigation and has noticed that the assessee’s receipt was also found from leasing of Kalyana Mantapa for marriage purposes which was considered to be the commercial activity by the AO in the light of the judgment of Hon'ble jurisdictional High Court in the case of Sri Subharam Trust in dated 30.5.2011. Besides, the AO has also examined the nature of receipts from the parents of students and he noticed that this receipt was over and above the tuition fees which was considered by the AO as capitation fees in the light of the provisions of Karnataka Educational Institutions (Prohibition of Capitation Fee) Act, 1984. Besides, the AO has also made necessary enquiries from the persons who have given the donations/contributions to the capitation fees. The investigation and the relevant observations of the AO during the course of assessment proceedings are extracted hereunder for the sake of reference:- & 207/Bang/2014 & 1099/Bang/2015 Page 12 of 31 “14. The sangham is also running educational institutions and running of college/ institutions falls under the limb "education". However imparting education which is a charitable activity, doesn't appear to be the predominant object of Sangham at least in practice. In fact the purpose of running the educational institutions is over- shadowed by profit making motives of the Society. It is worth mentioning that sangham is making huge surplus and there is no corresponding application of surplus/income . It was held by the Hon'ble Uttarakhand High Court in the case of Queen's Education Society, as reported in 177 Taxman 326, that if systematic profits are being earned, then the purpose may not be held as charitable and exemption u/s 11 may not be permissible. This decision appears to be squarely applicable to the facts of the case. 15. During the course of scrutiny proceedings for the A.Y. 2009- 10 the Sangham was asked to furnish various details in connections with the scrutiny proceedings including details of the donations received during the year vide the Questionnaire dt. 3.10.2011. The assessee submitted that the institution has received voluntary contributions from different persons and one list was given from which it was noticed that Sangham has received a sum of Rs. 1,14,20,000/- as donations which have been accounted under the head "voluntary contributions". It was further seen that the amount was received mainly in cash and varies from 1 lakh to 5 Lakhs. A notice dated 1.11.2011 was issued u/s 133(6) of the IT Act, 1961 to few of the persons whose name figured in the list and which is reproduced here: "1. Whether you have given any donation to this institution in earlier earlier or subsequent year, if yes, details thereof. 2. Whether you have given any donation to any other organization / institute during the year or earlier. 3. The purpose for which the donations were given. 4. The reasons for giving donations in cash and not in cheque. Whether the recipient trust had insisted on giving the amount in cash. 5. Whether your son / daughter / any close relative / ward was given admission in Kammavari Institute of Technology / Polytechnic during the Financial Year 2008-09, if so, name & 207/Bang/2014 & 1099/Bang/2015 Page 13 of 31 and academic course in which the admission was given. If so, whether any receipt was issued by the trust, if yes, a copy may kindly be furnished. 6. Are you assessed to tax, your PAN and income shown in assessment year 2008-09 and 2009-10 may be furnished. "
It was gathered from few persons that their son/daughter is studying in Kammavari Institute of Technology and accordingly the payment was made to the Society and for which receipts were issued towards voluntary contribution. Moreover these persons have also clarified that they have made the donation only to this assessee and that too in the year of admission of their ward. From the perusal of those letters/information prima facie it appeared that the assessee is taking huge donations/capitation fees in the garb of voluntary contributions. 17. In this connection, it would be relevant to refer to the provisions of Karnataka Educational Institutions (Prohibition of Capitation Fee) Act, 1984, which is reproduced as under- 2. Definitions.- In this Act, unless the context otherwise requires,- (b) "capitation fee" means 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; (c) "educational institution" means any institution by whatever name called, whether managed by Government, private body, local authority, trust, university or any other person carrying on the activity of imparting education in medicine or engineering leading to a degree conferred [by a university established under any law for the time being in force and any other educational institution, or class or classes of such institution, as the Government may, by notification, specify; 3. Collection of capitation fee prohibited.- Notwithstanding anything contained in any law for the time being in force, 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: & 207/Bang/2014 & 1099/Bang/2015 Page 14 of 31 Provided that subject to such rules as may be prescribed or such conditions as may be specified by general or special order, from time to time, the Government may, notwithstanding anything contained in this Act permit any educational institution established before the date of commencement of this Act and maintained or developed solely or substantially out of amounts collected as capitation fee or any class or classes of such institutions, to continue to receive such capitation fee or cash deposits in such manner, to such extent and for such period as the Government may, by order, specify, so however that such period shall not in any case extend beyond five years from such date.”
16. In the succeeding year i.e., AY 2010-11, the AO has also made further investigation and reproduced the details of the persons from whom the capitation fees was received by the assessee.
While dealing with the appeal for the AY 2011-12, the CIT(Appeals) was not convinced with the contentions of the assessee and he himself also made a detailed enquiry in respect of voluntary contributions in his order. He has extracted the mode of payments and details of persons from whom the payments were made. He has also placed reliance upon various judgments in this regard while holding that capitation fees has been given in the disguise of so-called voluntary contribution. The relevant observations of the CIT(Appeals) is extracted hereunder for the sake of reference:-
“14. I have considered the AO's order and the appellant's submissions as above along with the available evidences. Coming first to the identification of the impugned amounts as "voluntary contribution", it is seen that the same have been credited as income in the Income & Expenditure Account and have not been & 207/Bang/2014 & 1099/Bang/2015 Page 15 of 31 posited as corpus donations eligible for separate treatment as capital receipts. The assessment records were verified to examine the evidences from the donors sent in response to the AO's queries u/s 133(6). It is an undisputed fact that except in one of the replies all the other respondents have described their payment as general donation, although it was admitted that the same was given at the time of admission of their ward to the engineering course in KSIT. Two of the sample "yes" replies from B.S. Rajashekar and Raveendran are extracted and scanned below in this regard with related money receipts available. In case of Raveendran the many receipt for the legally prescribed college fees and the voluntary contribution are both scanned shown.
In one case, the claimed donor completely denied having made the donations. His response is scanned and shown below: & 207/Bang/2014 & 1099/Bang/2015 Page 19 of 31 4.1 From a combined examination of all the above responses, it is clear that the character of the claimed receipts as being “voluntary'' in nature is not established. In fact, the contrary position of quid pro quo appears to be more true. It is also evident that part of the receipts are not supported by evidences as seen from the denial of one of the respondent reproduced supra. The characterization of the amount as voluntary contribution, therefore, cannot be accepted and the AO's conclusion appear to be far more reasonable. 4.2 It is also seen that even though the assessee claims that the donations/voluntary contributions have been received in the books of Kammavari Sangham (HO) its primary accounting and detailing, even as per its own submission before the AO, show that the amounts are received in respect of KSIT and KSP separately meaning KS Institute of Technology (for engineering courses) and KS Polytechnic (for diploma courses). The scan of the first page of the separate details submitted before the AO through submission dt. 05.03.2014 evidences this linkage to specific courses and not to any "general purpose" donation that would merit direct credit into the HO account.
4.3 The 'consent' by parents of students admitted to the appellant professional courses in their replies to the AO could not have been otherwise, considering the enormous but subtle pressures that constrain parents in such situation. Infact, the printed receipts of Andhra Bank, KSIT branch reproduced above with mention of "voluntary contribution for the year ... " displays the blatant and systematic manner in which parents of students seeking admission are pulled into the system where readymade receipts for voluntary contribution exist to give an impression of legitimacy for the so called "voluntary" donations.
Coming next to the question of whether the impugned amounts, therefore, partake the character of capitation fees, it is seen that for the impugned period of 2010-11, the admissions to private professional colleges for medical, dental and engineering courses were governed by the consensual arrangement entered into between the Government of Karnataka and the Karnataka Private Medical, Dental and Engineering Colleges Association (KPM & DECA) entered into under the Karnataka Professional Education Institution (Regulation of Admissions and Fixation of fee) (Special provisions) Act, 2006 being Act no.13 of 2006. The & 207/Bang/2014 & 1099/Bang/2015 Page 21 of 31 summary of the fees structure and percentage of seats as per this agreement is in respect of 3 categories i.e. Government quota seat (to be filled through CET (exam), COMED-K member institutions seat (to be filled through COMED-K exam) and the balance management quota or NRI quota seats to be filled largely through discretion (but subject to eligibility as per AICTE/MCI/DCI norms). The summary is reproduced below from page 14 of the consensual arrangement which was applicable for FY 2010-11. & 207/Bang/2014 & 1099/Bang/2015 Page 22 of 31 5.1 The above arrangement for diverse fee structures is a consequence of the Hon'ble Supreme Court's decisions in case of TMA Pai Foundation Vs. State of Karnataka (2002) (8 SCC 481), Islamic Academy of Education Vs. State of Karnataka (2003) (6 SCC 697) and P.A. Inamdar Vs. State of Maharashtra (2005) (6 SCC 537). In the case of Islamic Academy of Education the Hon'ble Court had said that a committee in each State, headed by a retired High Court Judge, should approve the fees structure which shall be binding for 3 years. The Hon'ble Supreme Court had opined in this order that the reasonable surplus for an educational institution should ordinarily range from 6% to 15%. It may be noted that starting from Academic Year 2011-12, the consensual arrangement provided that the "NRI/NRI sponsored/Others in the said category", which denoted the discretionary management quota seats, would have an upper limit of fees payable including development fees for the entire course, and this limit would be notified by each of the private institutions and fees collected accordingly. For the impugned FY 2010-11, notification of this upper limit was not included in the consensual agreement but in the light of the decisions of the Hon'ble Supreme Court cited above the existence of a fair, transparent system with caps on the fees that could be charged was inherently present. This included the tuition fees, various fees collected and paid to VTU and a reasonable component of "college and other fee" to support the differential facilities available in different colleges. The scanned receipt for "college fee" at page 06 of this order evidences this. This was intended to prevent the professional education imparting colleges from turning into "teaching shops" as had been strongly noted by the Hon'ble Apex Court in the case of Miss Mohini Jain vs State of Karnataka (1992) 2 SCC 666. 5.2 In the background of the above facts, and the existence of the anti-capitation fees related legislation referred to supra, it appears that the voluntary contributions collected with the quid pro quo of engineering seat for the wards of the donors carries a very strong colour of commercial orientation in education. In order to claim exemption of income u/s, 11(1)(a), the income should have been derived from a property held under trust wholly for charitable or religious purposes. In the case of the appellant, the educational institutions run by it constitute this property held under trust. It, therefore, follows that this property i.e. the & 207/Bang/2014 & 1099/Bang/2015 Page 23 of 31 educational institutions, should exist wholly for educational purposes, education being one of the components of charitable activities permitted u/s, 2(15). 5.3 The Hon'ble Supreme Court have passed a number of land mark decisions to determine whether an educational institution is existing wholly for educational purpose and not for purposes of profit. The decisions, even when rendered in the context of Sec.10(23C), are applicable to institutions claiming exemption u/s. 11 for their engagement in educational activities. The latest decision in this regard is the case of M/s Queens Education Society Vs. CIT (Civil Appeal no.5167 of 2008) in Order dt. 16.03.2015. The earlier land mark decisions of the Hon'ble Supreme Court have been discussed in this latest order and they include the following – 1. Aditanar Educational Institution Vs. Addl.CIT (1997) 224 ITR 310 2. Surat Art Silk Cloth Manufacturers Association (1980) 121 ITR 1 3. American Hotel & Lodging Association Vs. CBDT (2008) 301 ITR 86 4. Loka Shikshana Trust (1975) 101 ITR 234 5. The Indian Chamber of Commerce (1975) 101 ITR 796 5.4 The Hon'ble Court have held that if surplus results incidentally from the educational activities then no adverse inference should be drawn about the assessee having a profit motive or a commercial orientation. In the case of the appellant, the surplus has resulted from the claimed voluntary contributions in each of the institutions where it was taken from guardians/parents. The nature of the sample evidence, as discussed above, establishes the non-voluntary, or rather the "under duress" character of the contributions with desperate middle class or lower middle class parents even opting to become indebted in order to meet the financial demands for their child's professional education. I am in agreement with the AO that these contributions which are in excess of the fees fixed for the particular course satisfy the definition of "capitation fee" in terms & 207/Bang/2014 & 1099/Bang/2015 Page 24 of 31 of Sec.2(b) of the Act of 1984. As per this Act "capitation fee means any amount, by whatever name called, paid or collected directly or indirectly in excess of the fee prescribed u/s.5, but does not include the deposit specified under the proviso to Sec.3." 5.5 I am unable to resist reproducing the following extract from the order of the Hon'ble ITAT Hyderabad Bench 'B' in case of Vodithala Education Society vs ADIT (E) II Hyderabad (2008) 20 SOT 353 where, after discussing the Hon'ble Apex Courts position on the "sale of education" in the decision in case of Mss Mohini Jain and Islamic Academy of Education (supra) the Bench deserved as follows (paras 9 & 10) "Collection of capitation fee is contrary to the Constitutional scheme and prohibited by State enactment ....................When the assessee used the charitable activity/ educational institution as an apparatus for selling the education, in our opinion, the element of charity no longer remains in the activity of the assessee .................. In the case on hand, the material found during the course of survey operation clearly established the collection of money over and above the fee prescribed by Government for admission of a student. Therefore, it is a clear case of sale of education by the assessee-society. In our opinion as such, the assessee cannot be considered as a charitable institution under section 2(15) of the Income-tax Act. Therefore, the assessee is not eligible for exemption under section 11 of the Income-tax Act ................ We would like to further add that collection of money over and above the fees prescribed by the Committee appointed as per the directions of the Hon 'ble Apex Court is increasing day-by-day for admitting students under Management Quota. This collection of money over and above the fees prescribed by the committee, shall be construed as collection of 'Capitation fees' as held by the Apex Court. Collection of capitation fee is not an isolated problem of an individual student and the institution. This is a social problem and makes the availability of education beyond the reach of the vast majority of the population. More than 30 per cent of the population is living below poverty line and bulk of the remaining population is struggling for existence under poverty. In this economic situation, if we allow a few individuals who had an opportunity to establish an educational institution to & 207/Bang/2014 & 1099/Bang/2015 Page 25 of 31 collect money directly or indirectly for admission of students, it would be a threat to very existence of democracy and sovereignty of this country. Therefore, the judicial and quasi-judicial authorities, cannot be expected to be a silent spectators of what is happening in the educational institutions ..............." In the present case the AO as the quasi judicial authority has acted in the correct spirit of law to deny the exemption u/s 11.
6. The appellant has filed before me copies of orders passed by CIT(A), Mysore in its own case for AY 2009-10 and 2010-11. The latter order has merely followed the conclusion in the former. In the order for AY 2009-10 dt. 24.10.2013 the CIT(A) has accepted the appellant's claim that the activity of running educational institutions amounts to "charitable purpose" u/s.2(15), that the entire surplus has been applied to the objects of the society and that no violation u/s. 13 has been established by the AO. He, therefore, proceeded to allow the exemption u/s. 11 of the IT Act. 6.1 On examination of the CIT(A)'s order, I find that it suffers from some factual inaccuracies and incorrect observations about applicable legal provisions due to which I do not consider it necessary to follow his order. In respect of Ground nos. 4, 5 & 6 raised by the appellant before him, it was contended by the appellant that it was entitled to the benefit of Section 10(23C)(iiiad) in respect of the educational institutions where the gross receipts did not exceed Rs.1 crore. This was inspite of the claim for exemption in the IT return having been made u/s.
11. The CIT(A) at para 7.4 of his order has referred to the difference between Sec.11 and Sec.l0(23C). He has then mentioned that "the reliance placed on the decision of the Uttarakhand High Court in M/s Queens Educational Society (177 taxmann 326) is not applicable here as the said case was not rendered in the context of Sec.10(23C) of the Act. Hence, the observations that the appellant has made huge surplus etc are not germane to the issue relating to the exemption u/s. 11 of the Act." The factual inaccuracy in this observation is that the M/s Queens Education Society matter was actually delivered on Sec.10(23C)(iiiad). The issue of surplus generation is at the heart of understanding the profit orientation or charitable orientation of an assessee since the Hon'ble Supreme Court in the case of M/s Queen's Educational & 207/Bang/2014 & 1099/Bang/2015 Page 26 of 31 Society itself, as discussed supra, have observed that if the surplus is not incidental to the educational activity, it shows that the institution did not derive income from property held under trust for charitable purpose. 6.2 The CIT(A) had held that the AO is not the competent authority to conclude that the appellant has committed violation under the Karnataka Education Institution (Prohibition of Capitation Fee) Act of 1984. It needs to be mentioned that the AO's discussion in the order for that year has not been made as a competent authority under the anti capitation fee statute but only as a competent authority under the Income Tax Act since he is entrusted with the responsibility of verifying whether the claimed charitable activities of an assessee flow from legal and legitimate activities sanctioned by statute. The CIT(A) has commented negatively on the AO's inference "sought to be drawn based on the fact that the persons who gave the voluntary contributions had admitted their students in the institutions run by the appellant in certain cases." It needs to be emphasized that the quid pro quo arrangement even in that year did not exist in certain cases but in every case where an engineering seat had been offered to the concerned student. 6.3 In the impugned AY 2011-12, as in the earlier AYs 2009-10 & 2010-11, the assessee had filed its returns by claiming exemption u/s.
11. It was not, therefore, open to it to make a different claim in terms of Sec. 10(23C) at a later stage. In the case of Vodithala Education Society (supra) the Hon'ble ITAT at para 3 of their order, infact pulled up the AO by saying that "when the assessee specifically claimed exemption under section 11 of the Act, the Assessing Officer ought not to have considered the claim under section 10(23C) of the Act." The CIT(A)'s orders for AYs 2009-10 & 2010-11 do not appear to have appreciated this fact that the appellant cannot make one claim in the return and another before appellate authorities, thus subverting the sanctity of the return.
7. With regard to the judicial decisions relied upon by the AO and the appellant, I am inclined to hold that the case laws cited by the AO in the context of capitation fee and quid pro quo based contributions are appropriate. The appellant's cited case laws have all been superceded by the latest decision of the Hon'ble Apex Court in case of M/s Queens Educational Society & 207/Bang/2014 & 1099/Bang/2015 Page 27 of 31 (supra). The decision of the Hon'ble Punjab & Haryana High Court in the case of Pine Grove International Charitable Trust 230 CTR 477 cited by the appellant is found to have been delivered in the context of Sec.10(23C) and does not fit the different facts in the appellant's case. The appellant had claimed that the AO's citing of the Hon'ble Supreme Court decision in the case of Mohini Jain Vs. State of Karnataka supra has no application to its case since the appellant had not collected any capitation fee at all in the first place. This understanding of the appellant is found to be factually incorrect since the in the Mohini Jain decision, the Hon'ble Supreme Court had said that the fees charged in private institutions in excess of tuition fees fixed in government colleges is "deemed to be capitation fees". In the present case, the AO has similarly pointed out that the capitation fees has been given in the disguise of so called "voluntary contributions", The identity of facts is, thus, obvious."
From a careful perusal of the orders of the lower authorities and details of receipt of donation/voluntary contribution, we find that these donations/voluntary contributions were received over and above the tuition fees. There is no iota of evidence produced by the assessee to support that these donations were towards the corpus. Had it been a case of donation towards corpus, there should be a specific narration on the donation receipts that this contribution was made towards the corpus. Moreover in Karnataka receipt of donation/capitation fee is strictly prohibited by the Karnataka Educational Institutions (Prohibition of Capitation Fee) Act, 1984. Through this legislation, the Govt. of Karnataka has prohibited the receipt of capitation fees by defining that “capitation fee” means any amount by whatever name called, paid or collected directly or indirectly in excess of the fee prescribed u/s.5, but does not include the deposit specified under the proviso to Sec.3. Undisputedly, the assessee has received these voluntary contributions/donations over and above the tuition fees. Now the onus is upon the assessee to demonstrate that the voluntary contributions/donations falls within the proviso to section 3 of the Act, but no evidence is placed on record that proviso to section 3 would apply in the case of assessee. Where the definition of “capitation fee” has been given in the Karnataka Educational Institutions (Prohibition of Capitation Fee) Act, 1984, no other definition of “capitation fee” can be adopted, as the word “capitation fee” has not been defined in the Income- tax Act. The Revenue has also established that donation/voluntary contribution was collected from the parents of the students admitted during the year and more so the parents were not financially sound to part with substantial amount of donation in Lakhs to the educational institution.
Therefore, we are of the view that the receipts of the assessee from the parents of students is nothing but capitation fees and once capitation fee is charged for admission of the students by the educational institution, the educational institution can be held that it is not engaged in charitable activities, but selling the education in the light of the judgment of the Hon’ble Supreme Court in the case of Ms. Mohini Jain v. State of Karnataka & Ors. (1992) 3 SCC 666 wherein the Hon’ble Supreme Court has held that capitation fees was nothing but price of selling education and such “teaching shops” were contrary to the Constitutional scheme and abhorrent to our Indian culture. We have also carefully examined the & 207/Bang/2014 & 1099/Bang/2015 Page 29 of 31 judgments referred to by the parties and in the case of P.S. Govindaswamy Naidu & Sons v. ACIT, 324 ITR 44 (Mad), the Hon’ble Madras High Court has held that where it was found that amount paid by parents of students admitted to assessee’s educational institution was not corpus donation amount, but it was collected only by way of capitation fees, such capitation fees was not exempt in the hands of assessee institution.
We have also carefully examined the judgments referred to by the assessee, but they all are distinguishable on facts, as in none of the judgments it has been held that even though the assessee received donation over and above the tuition fees from the parents of the students who belonged to mediocre family is a donation towards the corpus and not the capitation fee as defined in the Karnataka Educational Institutions (Prohibition of Capitation Fee) Act, 1984.
So far as the grant of registration u/s. 12AA by the Tribunal is concerned, we are of the view that the scope of grant of registration u/s. 12AA is entirely different than the scope of grant of exemption u/s. 11 of the Act. While granting registration u/s. 122AA of the Act, the authority was required to examine the objects of the society if the object of the society is of charitable nature, but no other contrary material is placed, the registration u/s. 12AA is to be granted.
But while granting exemption u/s. 11 of the Act, the AO is required to examine the nature of activities of the assessee and if he noticed that the & 207/Bang/2014 & 1099/Bang/2015 Page 30 of 31 assessee is not engaged in charitable activities and is engaged in commercial activities, the benefit of exemption u/s. 11 can be denied. In the instant case, the AO has brought out enormous evidence on record especially to establish that the assessee is not engaged in charitable activities and all these evidence was overlooked by the CIT(Appeals) in the AYs 2009-10 & 2010-11. Therefore, we find no error in the order of the AO by denying the benefit of exemption u/s. 11 to the assessee.
In the result, the orders of the CIT(Appeals) in & 207/Bang/14 are set aside and the orders of the Assessing Officer are restored, whereas in ITA No.1099/Bang/2015 the order of the CIT(Appeals) is confirmed.
The appeals of the Revenue are allowed and that of the assessee is dismissed.
Pronounced in the open court on this 17th day of June, 2016.