Income Tax Appellate Tribunal - Hyderabad
Matrusri Education Society, Hyderabad vs Adit, Hyderabad on 31 July, 2018
ITA Nos 417 to 419 of 2009 Matrusri Education Society Hyderabad.
IN THE INCOME TAX APPELLATE TRIBUNAL
Hyderabad ' A ' Bench, Hyderabad
Before Smt. P. Madhavi Devi, Judicial Member
AND
Shri S.Rifaur Rahman, Accountant Member
ITA Nos. 417 to 419/Hyd/2009
(Assessment Years: 2003-04 to 2005-06)
Matrusri Education Society Vs Asstt./Deputy Director of
Hyderabad Income Tax (Exemptions) II
PAN: AATAM2433P Hyderabad
(Appellant) (Respondent)
For Assessee : Shri Y. Ratna Kar
For Revenue : Shri J. Siri Kumar, DR
Date of Hearing: 19.07.2018
Date of Pronouncement: 31.07.2018
ORDER
Per Smt. P. Madhavi Devi, J.M.
All the three appeals are filed by the assessee against the order of the CIT (A)-IV, Hyderabad, dated 25/04/2006 for the A.Ys 2003-04, 1004-05 and 2005-06 respectively. The assessee has raised the following grounds of appeal for A.Y 2003-04.
"1. The order of the learned Commissioner of Income tax(Appeals)IV, Hyd. dt. 13-2-2009 is contrary to law and facts.
2. The appellant contends that it is entitled to exemption u/s 11 of the LT Act and no part of its income is liable to be taxed for the assessment year under appeal.
3. The appellant contends that it has complied with all the provisions of sections 11 to 13 of the LT Act and therefore any surplus remaining for the year is not liable to tax as income in the hands of the society.Page 1 of 18
ITA Nos 417 to 419 of 2009 Matrusri Education Society Hyderabad.
4. It is contended that the learned Commissioner of Income tax (Appeals)IV, Hyd. erred in coming to the conclusion that voluntary contributions in the form of development fund received by the appellant society amounting to Rs.1,21,25,001 for the assessment year 2003-04 should be treated as donations ~~ ~ collected as quid pro quo for the admission of students under management quota.
5. It is contended that voluntary contributions received are for the corpus fund and cannot be called as income. The learned Commissioner of Income tax(Appeals)IV, Hyd. should have seen that the appellant in any event, has considered these voluntary contributions as income for the purpose of computation of income.
6. It is contended that the learned Commissioner of Income tax (Appeals)IV, Hyd. erred in not applying the decisions of the Supreme Court in C.LT Vs. Bijili Cotton Mills Ltd. reported in 116 ITR P.60 at pages (73 & 74) and that of the A.P High Court in the case of Chairman, A.P Welfare Fund Vs. C.LT reported in 143 ITR P.84 for the purpose of considering whether the contributions are voluntary or not. The learned Commissioner of Income tax(Appeals)IV, Hyd. fell into error in assuming that the above judgments are inapplicable and in distinguishing them.
7. It is contended that the learned Commissioner of Income tax(Appeals)IV, Hyd. erred in considering the various statements recorded from the donors without giving an opportunity of cross examining them. The said statements could not have been looked into by the learned CIT(A)-IV Hyderabad for drawing any adverse inference.
8. It is contended that the payment of the said amount is voluntary on the part of the donors. Without prejudice, if is further contended that even if the said voluntary contributions are held to be not voluntary or held to be quid pro quo for giving admissions under the management quota, yet is does not destroy the charitable character of the Institution. It is further contended that the contents of para 4.4 of the order of CIT (A) is erroneous and is denied.
9. 11 is contended that to the last rupee of amounts received have been accounted for and not a single rupee is spent for any purposes other than for the objects of the educational institution. In the facts and circumstances of Page 2 of 18 ITA Nos 417 to 419 of 2009 Matrusri Education Society Hyderabad.
the case, the appellant should have been given exemption of its income u/s 11 of the LT Act.
10. The learned Commissioner of Income tax(Appeals) failed to correctly apprehend the contents of Circular No.11 of 2008 dt. 19-12-2008. It is submitted that even if there is any profit derived in the course of achieving the objects viz. education, it does not render income liable to tax in as much as such profits are merely incidental.
11. It is contended that mere receipt of donations does not destroy the charitable character of the institution and the test should have been whether the moneys received have been applied for the objects of the society. In the appellant's case there is no denial that to the last rupee of funds have been applied on the objects of the appellant society and the learned Commissioner of Income tax(Appeals)IV, Hyd. should have held that the income of the appellant society is not liable to tax u/s 11 of the LT Act.
12. The appellant contends that it has no knowledge of the letter of the Commissioner of Income tax(Appeals) dt. 25-4-2007 addressed to the Addl. Director of Income tax(Exemptions) (Para 6 of the appellate order) and the remand report dt. 31- 5- 2007 sent by the Assessing Officer (para -6. I) Ill} I' and several letters referred to at para 6.2 of the appellate order. All enquiries were made behind the back of the appellant. At no stage these matters were put to the appellant for its objections by the learned Commissioner of Income tax(Appeals).
13. It is contended that the inference drawn at para 8 in relation to ~~e reasons why the Secretary(Higher Education) or A.C.I.T.E could not have taken action, is a figment of imagination of the learned Commissioner of Income tax(Appeals). He has indulged in wild guess work and invoked non existent inferences to draw adverse conclusions. It is contended that the learned Commissioner of Income tax(Appeals) made up his mind first not to allow the appeal and later went in search of some reasons willy nilly to deny the appellant's claim to justify his action.
14. The learned Commissioner of Income tax(Appeals)IV, Hyd. erred in relying on the decision of the Hon'ble Tribunal in Vodithala Education Society in ITA No.1138/Hyd.l2006 for the assessment year 2003-04. It is contended that the said order of the Hon'ble Tribunal is inapplicable because the issue therein was whether there was any violation of provisions of section 13 (l)( c) Page 3 of 18 ITA Nos 417 to 419 of 2009 Matrusri Education Society Hyderabad.
of the I. T Act for denying the benefit of section 11 of the I. T Act and not merely because of the society received contributions I donations from its students admitted under the management quota".
Except for the quantum, the grounds of appeal raised for the A.Ys 2004-05 and 2005-06 are the same.
2. Brief facts of the case are that the assessee is a Society registered u/s 12A of the I.T. Act and during the relevant financial, it had collected development fund to the tune of Rs.1,21,25,001 which had been directly taken to the balance sheet without being admitted as income in the income and expenditure a/c. On going through the details and the addresses of the alleged donors, their modes of payment, along with the names of the students admitted during the year in the first year into various courses in the Engineering stream and the names and addresses of the parents, the AO found clear nexus between each student admitted into the engineering course under the management quota and a particular group of 'donors' who are shown to have made "voluntary contributions" to the development fund. In order to verify the veracity of the said fund, the AO recorded the statement of some of the parents who stated that the donations were given by their close relatives and friends, though their financial position did not permit them to donate voluntarily, for getting a seat in the assessee's educational institution.
3. In view of the above statement, the AO concluded that the assessee had collected huge extra consideration over and above the official fee and therefore, it was the capitation fee which Page 4 of 18 ITA Nos 417 to 419 of 2009 Matrusri Education Society Hyderabad.
was being collected. He therefore, held that the assessee is not carrying on charitable activity and also further that the exemption u/s 10(23C)/11 is available only to those colleges or societies which are run solely for educational purposes and not for the purpose of the profit. He therefore, disallowed the exemption u/s 11 and also u/s 10(23C)(vi) of the Act. Aggrieved, the assessee preferred an appeal before the CIT (A), who confirmed the order of the AO by following the decision of the ITAT in the case of Vodithala Education Society in ITA No.1138/Hyd/2006 for the A.Y 2003-04. Aggrieved, the assessee filed appeals before the Tribunal.
4. Since there were varying decisions of various Benches of the Tribunal on the issue, the case was referred to the Special Bench for a decision on the issue as to whether the assessee was eligible for exemption u/s 11 of the Act. The Special Bench was however, disbanded after taking into consideration, the contentions of the assessee that similar matter is pending before the Hon'ble High Court of Andhra Pradesh and that the ITAT Chennai had adjudicated the issue in favour of the assessee. Therefore, the matter is again posted before the Division Bench for adjudication.
5. The learned Counsel for the assessee, Shri Y. Ratnakar, while reiterating the submissions made by the assessee before the authorities below, has also referred to the written submissions filed by him. He submitted that this issue is covered in favour of the assessee by the decision of the Coordinate Bench Page 5 of 18 ITA Nos 417 to 419 of 2009 Matrusri Education Society Hyderabad.
of this Tribunal in the case of Vignana Jyothi in ITA No.1751/Hyd/2014 dated 26.04.2017 and therefore, the issue needs to be decided in its favour. Copy of the said order is filed before us.
6. The learned DR, however, supported the orders of the authorities below.
7. Having regard to the rival contentions and the material on record, we find that in the case of Vignan Jyothi (Supra), the Coordinate Bench of this Tribunal after considering the decisions of various Benches of the Tribunal as well as the Hon'ble High Courts and also as to whether the assessee therein has violated the provisions of A.P. Educational Institutions (Regulations of Admissions and Prohibition of Capitation Fees) Act, 1983, has observed that the assessee therein is eligible for exemption u/s 11 of the Act and also u/s 10(23C)(vi) of the Act. The relevant paras of the said order reproduced hereunder for ready reference:
"10. We have considered the rival contentions and submissions and perused documents placed on record. As can be seen from the order, the Ld.DIT(E) based his conclusion on the basis of enquiry from four parents/relations in assessment proceedings concluded in the year 2007 for AY. 2005-06 and in year 2008 for AY. 2006-07. Even though those findings in assessments were not conclusive and matters were restored to AO for further enquiry, no such enquiry was made as can be seen from the orders passed again on 31-03-2014 for the above years. These orders at present are pending adjudication before CIT(A). Thus, the order of DIT(E) is based on premature conclusions and the contention of Ld.CIT-DR stating that the department has 'conclusively proved' the collection of capitation fee is devoid of any merit.
10.1. As can be seen from the facts, only four cases were examined and on the basis of that, all the donations received including from Members of Society were considered as capitation fees and were brought to tax. Assessee filed the letters from the above four persons that the donations Page 6 of 18 ITA Nos 417 to 419 of 2009 Matrusri Education Society Hyderabad.
are voluntary and no capitation fee was collected. No further enquiry was conducted in spite of remitting matter for examination of the same. Even though the matter is pending adjudication before the Ld.CIT(A) in assessment proceedings, we are of the opinion that these four isolated instances which were relied on by AO does not conclusively establish that the society has violated the objects for which it was established and registration framed so as to invoke provisions of Section 12AA(3) to cancel registration.
11. Before adverting to the issue of cancellation, it would be better to analyse the concepts of charitable purpose, taxability of voluntary contributions, capitation fee, whether the donation can be considered as capitation fee and profits and profiteering - the reasons given by the Ld. DIT(E) while cancelling the registration. These are analysed herein onwards.
11.1. First we will consider the meaning of 'Charitable purpose' under the Income Tax Act.
Section 2(15) of the Act defines 'charitable purpose' as under: "Charitable purpose" includes relief of the poor, education, medical relief and the advancement of any other object of general public utility (not involving the carrying on of any activity for profit)".
The italicized words in the above definition were deleted w.e.f. 1st April, 1984 by the Finance Act1983. It can be seen that the above definition is not exhaustive or exclusive but is an inclusive definition. It classifies the charitable activities under the following four heads:
a) Relief of the poor;
b) Education;
c) Medical relief; and
d) The advancement of any other object of general public utility.
The ambit and scope of the word 'education' occurring in the definition of 'charitable purpose' under section 2(15) of the I.T. Act has been examined by the Hon'ble Apex Court in the case of Sole Trustee, Loka Shikshana Trust v. CIT reported in 101 ITR 234(SC) wherein the Hon'ble Supreme Court held that the word 'education' used in the definition will not encompass every acquisition of knowledge and gave a restricted meaning to the word 'education' by confining it to 'scholastic instruction' and 'normal schooling'.
11.2. In the case before us, the assessee society established educational institution to impart 'scholastic instruction' in various streams for general public and thus satisfies the condition laid down by the apex court in the above case. Therefore, assessee's activities constitutes 'education' as classified in 'charitable purposes' u/s. 2(15) of the I.T. Act. The further undisputed fact that the assessee has been granted the registration u/s.12A Page 7 of 18 ITA Nos 417 to 419 of 2009 Matrusri Education Society Hyderabad.
of the I.T. Act also confirms that department was also satisfied that the objects and activities of the assessee society are charitable in nature.
11.3. As pointed out in the above paragraph, prior to 1st April, 1984, the definition of 'charitable purpose' u/s. 2(15) of the Act, ended with the words 'not involving the carrying on of any activities for profit' (emphasis supplied by us). The Hon'ble Supreme Court in the case of Sole Trustee, Loka Shikshana Trust vs. CIT (cited supra) has held that the object of the trust therein was not 'education' within the meaning of sec 2(15) but 'an object of general public utility'. Thereafter, while holding that the publication of newspapers and journals carried on by the trust therein involved the carrying of an activity for profit, it was held that the income of the trust therein was not exempt from tax. It was in this context that the Hon'ble Apex court further held that it is not permissible to read the word "profit" in the expression "not involving the carrying on of an activity for profit" as "private profit" as the words "general public utility" themselves exclude objects of private gain. The relevant portion of the judgment is reproduced hereunder:
"It has been pointed out in the earlier part of the judgment that in the definition of charitable purpose as given in s. 2(15) of the Act the words "not involving the carrying on of any activity for profit" have been added at the end of the definition as it was given in s. 4(3) of the Indian IT Act, 1922. The position as it existed under the Act of 1922 was that once the purpose of the trust was relief of the poor, education, medical relief or the advancement of any other object of general public utility, the trust was considered to be for a charitable purpose. As a result of the addition of the word "not involving the carrying on of any activity for profit" at the end of the definition in s. 2(15) of the Act, even if the purpose of trust is "advancement of any other object of general public utility", it would not be considered to be "charitable purpose" unless it is shown that the above purpose does not involve the carrying on of any activity for profit. The result thus of the change in the definition is that in order to bring a case within the fourth category of charitable purpose, it would be necessary to show that : (1) the purpose of the trust is advancement of any other object of general public utility, and (2) the above purpose does not involve the carrying on of any activity for profit. Both the above conditions must be fulfilled before the purpose of the trust can be held to be charitable purpose. It is not necessary for the decision of the case, as already mentioned above, to go into the question as to whether the words "not involving the carrying on of any activity for profit" also qualify the first three categories of charitable purpose, namely, relief of the poor, education and medical relief.
Thus, it is clear that the reference to 'profit' not meaning 'private profit' by the Apex court was in reference to the fourth category of charitable activity and not to the first three categories.
11.4. The Hon'ble Supreme Court, further, in the case of Dharmadeepti v. CIT, Kerala reported in 114 ITR 454(SC) has considered the meaning of the definition of "charitable Purpose" as existing prior to 1st April, 1984 and has held that these words which restrict the exemption covers only the Page 8 of 18 ITA Nos 417 to 419 of 2009 Matrusri Education Society Hyderabad.
fourth head of 'object of general public utility' and do not refer to the first three heads of 'charitable purpose'. The relevant portion of the judgment reads as under:
"Apparently, when framing the Income Tax act, 1961, Parliament considered it appropriate to cut down the wide scope of these words by qualifying them with the restrictive words "not involving the carrying on of any activity for profit". This was done to emphasize that the residual general head was to be confined to objects which were essentially charitable in nature. It is, therefore, clear that the words "not involving the carrying on of any activity for profit" govern the words "the advancement of any other object of general public utility" and not the words" relief of the poor, education and medical relief" in sec 2(15). The heads "relief of the poor, education, and medical relief" remained unqualified by any express statutory restriction, and income arising from a profit-making activity linked with those heads enjoyed exemption without express limitation until section 13(1)(bb) was inserted in the Act by the taxation Laws (Amendment) Act, 1975, with effect from April 1, 1977."
11.5. The above judgment refers to the limitation placed by sec.13(1)(bb) of the Act inserted by the Taxation Laws (Amendment) Act, 1975. Let us now examine the scope of limitation placed by Clause (bb) to section 13(1) inserted with effect from April 1, 1977. It reads as under:
" (bb) in the case of a charitable trust or institution for the relief of the poor, education or medical relief, which carries on business, unless the business is carried on in the course of the actual carrying on of a primary purpose of the trust or institution."
However, this provision has been omitted by the Finance Act, 1983 (w.e.f.1-4-1984) in view of the new provision made in Sub-section (4A) of section 11. The provisions of sub-section (4A) as inserted by the Finance Act, 1983 (w.e.f.1-4-1984) read as under:
"(4A). Sub-section (1), or sub-section (2) or sub-section (3) or sub- section (3A) shall not apply in relation to any income, being profits and gains of business, unless
(a) the business is carried on by a trust wholly for public religious purposes and the business consists of printing and publication of books or publication of books or is of a kind notified by the Central government in this behalf in the Official Gazette: or
(b) the business is carried on by an institution wholly for charitable purposes and the work in connection with the business is mainly carried on by the beneficiaries of the institution.
And separate books of account are maintained by the trust or institution in respect of such business"
Sub-sec.(4A) has been substituted by the following by the Finance Act,1991 w.e.f. 1-4-1991.Page 9 of 18
ITA Nos 417 to 419 of 2009 Matrusri Education Society Hyderabad.
(4A) Sub-section (1) or Sub-section (2) or Sub-section (3) or Sub-section (3A) shall not apply in relation to any income of a trust or an institution, being profits and gains of business, unless the business is incidental to the attainment of the objectives of the trust or, as the case may be, institution, and separate books of account are maintained by such trust or institution in respect of such business.
Department Circular No.642 dated 11-12-1992 has explained that Sub- section (4A) has thus been amended to permit trusts and institutions to carry on business activities if the business activities are incidental to the attainment of its objective and the charitable or religious trust will no longer lose complete exemption from income tax, but however, the profits and gains from such business activity will be subject to tax.
11.6. Further, the larger Bench of the Apex Court in a subsequent judgment in the case of CIT v. Surat Art Cloth Manufacturers Association reported in 121 ITR 1 (SC) has laid down the following principles:-
(i). the words "not involving the carrying on of any activity for profit"
govern the words "objects of general public utility", and not the word "advancement" as wrongly held in the Indian chamber of commerce case. It is the object and not its accomplishment which should involve the carrying on of an activity for profit.
(ii) to satisfy the above quoted words, it is not at all necessary that there should be a provision in the constitution of the trust or institution that the activity shall be conducted on a no profit no loss basis or that no profit shall be prescribed.
(iii) the definition of "charitable purpose" would not be satisfied (a) where an activity for profit is actually carried on as an integral part of the purpose or in order to advance the purpose, or (b) where the trust deed expressly provides that the purpose shall be carried out by engaging in an activity which has predominant profit motive, in which case it would be non- charitable even if no activity for profit is actually carried on.
(iv) "Activity for Profit" connotes that the predominant object of the activity must be the making of profit: it is not enough that as a matter of fact the activity results in profit. Bhagwati J said, "Where an activity is not pervaded by profit motive but is carried on primarily for serving the charitable purpose, it would not be correct to describe it as an activity for profit merely because profit accrues." Pathak J observed, "I am unable to accept the proposition that if the purpose is truly charitable, the attainment of the purpose must rigorously exclude any activity for profit"
(v) On the other hand, where profit making is the predominant object of the activity, the purpose, though it may aim at advancing an object of general public utility, would cease to be a charitable purpose under s.2(15).
Thus, where the profit earned by a charitable institution is not pursuant its objectives but is incidental to its activities, such an institution will still be eligible for exemption from income tax u/sec.11 of the Act, but the Page 10 of 18 ITA Nos 417 to 419 of 2009 Matrusri Education Society Hyderabad.
incidental profit so earned would be liable to income tax unless it is applied for the objects of the charitable institution.
11.7. In the scheme of the Act and provisions, a charitable institution is eligible for exemption u/s.11 of the Act, provided it fulfils the conditions prescribed u/s.11 to 13 of the IT Act. Sec.11(1) lays down certain conditions regarding application of income by the trust on charitable objects which should be fulfilled before claiming exemption under that section. Therefore, the exemption u/s11 is not automatic and the AO is required to examine the fulfillment of the conditions specified under sections 11 to 13during the assessment proceedings of the relevant assessment years. The first and foremost basic requirement for claiming the benefit of exemption under s.11 is registration u/s.12A/ 12AA of the Act and without the same, exemption under s.11 would not be available at all. Section 12 specifies the income which is to be deemed to be the income of the charitable institution, while sec.12A prescribes the conditions for applicability of sections 11 and 12 and section 12AA prescribes the procedure for registration. Section 13 specifies the conditions under which section 11 is not applicable.
11.8. As set out earlier, the exemption u/s. 11 is available to an assessee on the basis of its character, i.e., exemption u/s.11 is available to an assessee whose activities are wholly for charitable or religious purposes. Clause (a) of sub-sec.(1) provides that the income derived from property held under trust wholly for charitable or religious purposes is unconditionally exempt to the extent it is applied to such purposes in India or is allowed to be accumulated for such purposes. Thus, though the property may be held wholly for charitable or religious purposes, the whole or a part of the income may still be disentitled to exemption in a particular year on the ground that:
i. the income is applied to purposes other than charitable or religious; ii. the income is applied to any purpose outside India;
iii. the income accumulated is in excess of the permissible limit of accumulation;
iv. the income shown in the accounts of a business undertaking held upon trust is less than the income computed in accordance with the provisions of the Act;
v. the accounts are not audited; or vi. the funds are not invested or deposited according to statutory requirements.
Thus, the portion of the trust-income entitled to exemption may vary from year to year and therefore the AO has to examine the issue year after year and section 11 can have no application unless the source of the income is some property, and the property is held under trust or other legal obligation wholly or in part for a religious or charitable purposes.Page 11 of 18
ITA Nos 417 to 419 of 2009 Matrusri Education Society Hyderabad.
11.9. Clause (d) of sub-sec(1) of sec.11 provides that voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution shall not be included in the total income of the previous year of the person in receipt of the income. On the other hand, section 2(24)(iia) defines 'income' to include voluntary contributions received by a trust created wholly or partly for charitable or religious purposes by an institution established wholly or partly for such purposes[.....]. Sub-sec.(1) of section 12 also provides that any voluntary contributions received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes (not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution) shall, for the purposes of sec.11, be deemed to be income derived from property held under trust wholly for charitable or religious purposes. Thus, the income referred to under 11(1)(d) is considered to be capital receipt and excluded from the from the 'deemed income' under sec.12(1) of the Act. Therefore, unless the donations received by the assessee falls under the category of 'voluntary contribution' u/s 11(1)(d) of the Act, it would be income or deemed income of the assessee.
11.10. The test of the nature of contributions being voluntary or compulsory and whether it is for the corpus, or not intended for corpus, is only limited for the purpose of considering whether such contributions have to be taken as income or not. The IT Act nowhere states that if the contribution is compulsory (or not voluntary) the recipient ceases to be charitable in nature or that the benefit of section 11 of the IT Act should be denied. Support can be taken from the following decisions:
(a) Shri Belimatha Maha Samsthana Socio Cultural & Educational Trust reported in (2010) 46 DTR Judgment 290(Kar)
(b) DCIT vs. Vellore Institute of Technology 46 SOT 224
(c) Karandhai Tamil Sangham, Thanjavur Vs. CIT in ITA. No. 960/Mad/2011 dt.9-8-2011.
Even if the donations are held to be not voluntary and are linked to admissions, it still does not destroy the charitable character of the assessee. Thus, in our opinion collecting donations voluntarily or compulsorily may have an effect in computation of income but not to the nature of the activities of the Trust-society.
11.11. The next issue for consideration is whether the 'donations' received/collected by the assessee can be termed as 'capitation fee'? Whether collection of 'Donations' can be considered as 'profiteering' by the assessee? To answer this question, it is necessary to understand the meaning of the word "capitation fee". The Income Tax Act has not defined "capitation fee" and therefore it is necessary to look at the meaning given to this word in other related Acts and the judicial pronouncements thereon. The Right of Children to Free & Compulsory Education Act, 2009 defines 'Capitation fee' in Section 2(b) as follows:
Page 12 of 18ITA Nos 417 to 419 of 2009 Matrusri Education Society Hyderabad.
"Capitation fee" means any kind of donation or contribution or payment other than the fee notified by the School. "
Thus, the term 'capitation fee' includes all amounts of money by whatever name it is called or may be called by various names viz., donation/security deposit fee/maintenance fee/activity fee/development fee/entertainment fee etc. Ld DIT placed reliance upon the judgment of the Hon'ble Apex court in the case of Miss Mohini Jain v. State of Karnataka [1992] 2 SCC 666 and also the decision of the ITAT in the case of Rajah Sir Annamalai Chettiar Foundation v. DIT(E) (2011) 48 SOT 502/15 Taxmann.com 313, in support of his decision that collection of capital fee for admission amounts to sale of education and hence is no longer a charitable activity, but is an activity run with a profit motive and is not being run wholly for charitable purposes as required u/s 12(1).
11.12. We find that the AO in the assessments has relied upon the judgment of the Hon'ble Supreme Court in the case of TMA Pai Foundation & Others in Writ Petition (Civil) 317 of 1993 dated 31- 10- 2002 wherein it has been held that charging of capitation fee is against public policy and profiteering is not permissible in the field of education. However, Hon'ble Supreme Court also considered that receiving donations by an educational institution, unconnected with admission of students, could not obviously be treated as an equivalent of collection of capitation fee. From the decision of the Hon'ble Supreme Court, it is clear that private unaided institutions are prohibited from collecting capitation fee and profiteering, but not from making profit. Different institutions are entitled to notify different fee for the same course and the same institution may notify different fees structure for different courses. In such cases, the fee notified by the institution would not be considered as capitation fee. We further find that in the subsequent judgment in the case of Action committee, Unaided Private Schools and others Vs. Director of Education reported in 2009 11 SCALE- P.11(SC), the Hon'ble Supreme court considered its subsequent judgments in the cases of P.A.Inamdar and Islamic Academy of Education and has considered the question as to whether admission procedure and fee structure of an unaided minority and non-minority institutions imparting professional education can be regulated or taken over by the committees ordered to be constituted by 'Islamic academy of education'. It took note of the following findings of the court in the case of P.A. Inamdar :
129. ......................State regulation should be minimal and only with a view to maintain fairness and transparency in admission procedure and to check exploitation of the students by charging exorbitant money or capitation fees.
139. To set up a reasonable fee structure is also a component of the "right to establish and administer an institution" within the meaning of Article 30(1) of the Constitution, as per the law declared in Pai foundation. Every institution is free to devise its own fee structure subject to the limitation that there can be no profiteering and no capitation fee can be charged directly or indirectly, or in any form.Page 13 of 18
ITA Nos 417 to 419 of 2009 Matrusri Education Society Hyderabad.
At para 29 of its order in the case of Action committee, Unaided Private schools(cited supra) , the Hon'ble apex court held as under:
29. I, in view of the statement of law laid down in P.A.Inamdar(supra), am of the opinion that the authorities of all the schools, particularly, unaided schools, may lay down its own fee criteria. Imposition of regulation, however, only is permissible for the purpose of exercising control over profiteering and not earning of a profit which would include reasonable return of the investment made. I say so because in T.M.A. Pai foundation, this court itself held:
11.13. Revenue has placed reliance in the case of Mohini Jain's case (cited supra), whereas there has been a change in approach thereafter in subsequent judgments of the Hon'ble Apex Court. In Mohini Jain's case, the Apex Court had held that any prescription of fee in excess of what was payable in Government colleges was a 'capitation fee' and would therefore be illegal. Subsequently, in the case of Unnikrishnan Vs. State of Andhra Pradesh [(1993) 4 SCC 697] (supra), the Hon'ble Court held that private unaided educational institutions running professional course were entitled to charge a fee higher than that charged by Government institutions for similar courses but that such a fee could not exceed the maximum limit fixed by the State. The court then formulated a scheme and directed every authority granting recognition/affiliation to impose that scheme upon institutions seeking recognition/affiliation, even if they were unaided institutions. In TMA Pai's case, the Hon'ble Court reconsidered its verdict in the Unni Krishnan's case and held that the scheme framed by the court and thereafter followed by the Governments cannot be called a reasonable restriction under Article 19(6) of the Constitution. It was held that the decision on the fee to be charged must necessarily be left to the private unaided educational institutions. It was further held that since the object of setting up an educational institution is by definition 'charitable', it is clear that an educational institution cannot charge such a fee as is not required for the purpose of fulfilling the object of development of education and expansion of the institution. It was further directed that a rational fee structure should be adopted by the Management, which would not be entitled to charge a capitation fee and appropriate machinery can be devised by the State or University to ensure that no capitation fee is charged and that there is no profiteering though a reasonable surplus for the furtherance of education is held to be permissible. The decision of the eleven Judge Bench in the case of TMA Pai (supra) was explained by the Apex Court in it subsequent judgments. In all the judgments, the Apex Court has, however, deprecated collection of capitation fee and profiteering by the educational institutions, but did not prohibit collection of funds for the purpose of achieving its objects.
11.14. It is thus seen that the private unaided professional colleges are entitled to fix their own fee structure subject to the limitation that there cannot be profiteering and collection of capitation fee. Only the payments, other than fee notified by the educational institution, are called as capitation fee. In the case before us, the assessee is alleged to have collected 'donations' in addition to the prescribed fee only from the students admitted under the management quota. The stand of the AO has been that the assessee has collected 'donations', it is in fact, payment for Page 14 of 18 ITA Nos 417 to 419 of 2009 Matrusri Education Society Hyderabad.
admission and hence 'capitation fee'. In view of this stand of the Revenue, it is, therefore, necessary to examine if the 'donations' is 'quid pro quo' for a seat in a college. G.O. Ms.No.33 dated 11-6- 2003 issued by the Govt. of Andhra Pradesh to implement the judgment of the Hon'ble Supreme Court in the case of TMA Pai (cited supra), has notified rules and regulations for admissions into under graduate professional courses through Common Entrance Test. The rules are applicable to all the Unaided Non-minority professional institutions imparting under-graduate professional courses in various streams stated therein. The EAMCET is the basis for admission of students into various unaided Non-minority professional institutions in the State of Andhra Pradesh (at the relevant point of time). 'Management Seats' are defined as the seats earmarked from out of the sanctioned intake of seats in each course to be filled by the Management of the Unaided Non-minority professional institutions. Rule 4 of the above rules provides that the Management seats shall be filled either on the basis of rank obtained in EAMCET conducted by the State scoring not less than 50% marks in aggregate or in group subjects in the qualifying examination. Rule 5(c) provides that 15% of the total intake of seats of each course shall be earmarked as Management seats. Rule 6(b) provides that the Managements seats shall be filled by the Management of the concerned Professional College by ensuring merit and transparency. Rule 7(B) provides that the Management seats shall be filled by the Management of the institution keeping them open to all the eligible candidates. Rule 9(2) provides that the Management may charge up to a fee of Rs.75,000/- per student per annum for the 15% seats under Management Quota while rule 9(3) provides that the Management shall not collect any other fees in the name of Development fee, Building fee, Infrastructure Development Fee etc., except Refundable Deposits like Library Deposit, Laboratory Deposit etc., and shall not charge any capitation fees or resort to profiteering in accordance with the judgment of the Supreme Court in the TMA Pai's case. From the above rules, it is evident that collection of capitation fee and profiteering is prohibited, but not receipt of any contribution. Fee is the sum charged for services rendered while donation is a sum set apart for a specific purpose. Then the question that arises is where the 'donation' is linked to the admission of a student, is it to be considered as a 'fee' and if it is over and above the prescribed fee then is it in the nature of 'capitation fee'? The Hon'ble Apex Court in the case referred to above has held that the managements of Private Un-aided professional colleges can prescribe their own fee structure in order to maintain and improve the institution. As seen from the rules framed above, 85% of the seats are to be filled by the Convener and the management has no role or discretion what-so-ever either in the admission process or in collection of fee as regards these seats. As regards the balance 15% of the seats under the Management Quota also, admission criteria is already fixed by the rules and the discretion of the management is limited. In such circumstances, can it be said that the assessee is involved in 'profiteering' or collection of capitation fee?
11.15. We have already brought out above, the observations of the Apex Court that in view of the majority judgment in the case of TMA Pai, different institutions may notify different fee for different courses and the same institution is also entitled to fix different fee for different courses.
Page 15 of 18ITA Nos 417 to 419 of 2009 Matrusri Education Society Hyderabad.
Therefore, if the institution has fixed different sums for different courses, they are perfectly entitled to do so but they must notify the same. To our understanding, the requirement of notifying the fee is to ensure transparency and accountability and to prevent misuse of funds. In the case before us, it is the stand of the assessee that these are voluntary contributions not connected to the admission of students. However, from the statements of the parents before the AO when enquired initially, the contributions are stated to be linked to the admission of students, even though they have filed affidavits subsequently denying the same. We also find that the institution has received the fund through D.Ds/ cheques and has issued receipts for the same and has also accounted for the same. Therefore, there is transparency in accounting the receipts. The Hon'ble Apex Court has further held that the private unaided institutions are entitled to collect funds for the maintenance and improvement of the institution. However, the objective of the collection of funds must be the imparting of standard education to the public at large. In the case before us, there is no allegation that the funds collected by the assessee society are for any other purpose or that the profits have been distributed to any person or persons. Therefore the collection of the donations by the assessee institution cannot be regarded as capitation fee.
11.16. Now issue arises about profiteering? Profiteering refers to taking advantage of unusual or exceptional circumstances to make excessive profits. It is the generation of disproportionate or unfair profit through manipulation of prices, abuse of dominant position, or by exploiting a bad or unusual situation such as temporary scarcity. Usually, there is no governmental control over profiteering unless it involves any illegal means. Sale of scarce goods at inflated price during war is an example for profiteering. But in the case before us, there is no case of unusual or exceptional circumstances to make excessive profits. It is not the case that engineering institutions in the state of Andhra Pradesh are only a few and therefore there was scarcity of seats and the assessee has exploited such a situation to make excessive profits. In the State of Andhra Pradesh, during the relevant period, there were a number of engineering colleges and there was no scarcity of seats for the aspirant students. In fact, there were newspaper reports that many colleges could not get the permitted number of students. The reasons for not getting the students may be many such lack infrastructure, or faculty or standard of education. The assessee institution may be commanding good reputation and may also be a sought after institution due to which the parents and the students may be willing to contribute to the development of the institution but that would not amount to profiteering by the institution.
12. That leads us to the question whether the assessee has violated the rules and regulations of the government of Andhra Pradesh framed for the purpose of prohibiting the collection of Capitation fees? One of the grounds on which the revenue has relied is that the assessee has violated the provisions of the Andhra Pradesh Educational Institutions (Regulation of Admission and Prohibition of Capitation Fee) Act, 1983 which prohibited collection of any fee other than the fee fixed by the Govt. The ld DR has placed before us the copy of the G.O.Ms.33, dt.11-06-2003 issued by the government of Andhra Pradesh to implement the judgment of the Page 16 of 18 ITA Nos 417 to 419 of 2009 Matrusri Education Society Hyderabad.
apex court in the case of T.M.A. Pai Foundation (supra) by framing the rules and regulations for admission of students into professional colleges. As per these rules, the fee prescribed per student admitted to an engineering college under the management quota was up to a sum of Rs.75,000/ per annum. There is no allegation that assessee has collected any fee in excess of such prescribed amount. In addition to the above fee notified, the assessee has also collected the donations not only from some parents/ relatives bit also from members of Society. Whether such collection of donation is prohibited by the Andhra Pradesh Educational Institutions (Regulation of Admission and Prohibition of Capitation Fee) Act, 1983 is to be examined. The reliance of the Revenue has been only on the rules framed vide G.O.Ms.33(supra) in which there is no mention of donations and contributions to the educational institutions. The rules have prescribed only the fee to be collected from the students and have prohibited the collection of the fee of any kind other than those mentioned in the rules. But Sec.6 of the Andhra Pradesh Educational Institutions (Regulation of Admission and Prohibition of Capitation Fee) Act, 1983 permits the receipt of voluntary donations. For the sake of easy reference the relevant provision is reproduced hereunder:
Sec.6. (1) Any donation of money to any educational institution, shall be made only in such manner as may be prescribed and not otherwise. (2) All moneys received by any educational institution by way of voluntary donations shall be deposited in the account of the institution, in any scheduled Bank and shall be applied and expended for the improvement of the institution and the development of the educational facilities and for such other related purposes as may be prescribed.
Thus, it can be seen that the Andhra Pradesh Educational Institutions (Regulation of Admission and Prohibition of Capitation Fee) Act, 1983 does not prohibit the receipt of voluntary donations or contributions, but the limitation placed is on the manner of payment of such donation and the purpose of the donation to be for the improvement and development of the institution. In the case before us, the assessee has received the donations by way of D.Ds/ cheques which are duly accounted for in its books of account and has also been applied for the purposes of the education only. Therefore, in our opinion, there is no violation of the provisions of Andhra Pradesh Educational Institutions (Regulation of Admission and Prohibition of Capitation Fee) Act, 1983".
8. Further, the decision relied upon by the learned Counsel for the assessee i.e. the Chief Commissioner of Income Tax vs. St. Peter's Educational Society reported in (2016) 385 ITR 66 (S.C) also confirm the view that the ultimate test is whether on an overall view of the matter in the concerned A.Y, the object is to Page 17 of 18 ITA Nos 417 to 419 of 2009 Matrusri Education Society Hyderabad.
make profit as opposed to educating persons. In the case of Queen's Educational Society vs. CIT reported in (2015) 372 ITR 699 (S.C), the Hon'ble Supreme Court has followed its decision the case of St. Peters Educational Society (Supra) to hold that the assessee there in is eligible for exemption u/s 11 of the Act. Respectfully following the above decisions, the assessee's appeals are treated as allowed.
9. In the result, assessee's appeals are allowed.
Order pronounced in the Open Court on 31st July, 2018.
Sd/- Sd/-
(S.Rifaur Rahman) (P. Madhavi Devi)
Accountant Member Judicial Member
Hyderabad, dated 31st July 2018.
Vinodan/sps
Copy to:
1 Matrusri Education Society, No.16-1-486, Saifabad, Hyderabad
500059
2 Asstt/Dy. Director of Income Tax (Exemptions)-II, Hyderabad
3 CIT (A)-IV Hyderabad
4 Director of Income Tax (Exemptions) Hyderabad
5 The DR, ITAT Hyderabad
6 Guard File
By Order
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