Donations received by college were not capitation fee making trust ineligible for claiming exemption u/s 11

Donations received by college were not capitation fee and generation of surplus did not render it ineligible for claiming exemption u/s 11 and 12 of the Act

ABCAUS Case Law Citation:
ABCAUS 2643 (2018) (11) ITAT

Important Case Laws Cited/relied upon:
CIT vs Pulikkal Medical Foundation Private Limited, 210 ITR 299 (Ker)
Breach Candy Hospital Trust vs Chief CIT 322 ITR 246 (Bom).

The issues raised in instant batch of appeals mainly involved exemption claimed by the assessee u/s 11 of the Income Tax Act, 1961 (the Act)

The assessee was a trust registered u/s 12A of the Act. The trust was running an engineering college and was granted the status of a deemed university. Being registered u/s 12A of the Act, the assessee was regularly claiming exemption u/s 11 of the Act.

The assessee was subjected to a search u/s 132 of the Act. In the returns filed in response to notices issued u/s 153A of the Act, the assessee admitted ‘’Nil’’ income after claiming exemption u/s 11 of the Act.

The Assessing Officer (AO) however denied the claim of exemption. One of the grounds for denial for exemption was that the trust was collecting amounts in excess of the prescribed fees from students, which was nothing but capitation fee. Such donations were not voluntary but given by parents of the students admitted to the institution, as a quid-pro-quo.

It was alleged that the capitation fee accepted in the garb of donation was claimed as corpus donations which were increasing on an year to year basis. That surplus generated by the assessee for the various years, reflected its activity to be more in the nature of business than any charity.

The AO gave the finding that a large number of parents had confirmed that donations paid by them were nothing but capitation fee.

The Assessing Officer (AO) also relied upon the judgment of the Hon’ble Supreme Court in which it was held that the capitation fee collected by private education institutions was nothing but a price for selling education and this was contrary to the edicts in Constitution of India.

Aggrieved, the assessee appealed to Commissioner of Income Tax (Appeals) challenging the denial of exemption u/s 11 of the Act and also various additions made while computing total income, apart from challenging the legality of notice issued u/s 153A of the Act.

On the aspect of treating the donations as Capitation fees and assessing the surplus under the head ‘’profits and gains of business’’, the Commissioner of Income Tax (Appeals) held in favour of the assessee, relying on an order of a Co-ordinate Bench in assessee’s own case.

Aggrieved, the Revenue had filed instant appeals. The assessee was also in appeal being aggrieved by the order of the Commissioner of Income Tax (Appeals) in upholding the notice issued u/s 153A of the Act as valid.

With respect to the question whether the donations received by the assessee from the students/ parents were capitation fee and if so, whether such receipts, resulting in annual surplus, made the assessee ineligible for claiming exemption u/s.11 and 12 of the Act, the Tribunal observed that in earlier years, the question already stood answered in favour of this assessee by the Tribunal.

The Tribunal in had observed that fees chargeable from students were regulated and controlled by AICTE / DOTE through the University. Hence, the assessee could not have engaged in ‘profiteering’ as alleged by the Revenue by increasing the students strength nor could it have charged a higher fee.  

The Tribunal had noted that the Govt. itself recognizes that unaided self financing educational institutions cannot be run by charging the lower fees charged by aided financial institutions. Therefore, the Government had permitted them to charge higher fees for the different categories.

The Tribunal opined that the charging of higher fees from a certain percentage of students will not be detrimental to the “Charitable” nature of the institutions as this charging of higher fees from the affluent students is done only to subsidise the cost of education of the needy students especially when this scheme of “Public private partnership” is an instrument of State policy.

The Tribunal had accepted the assessee’s submission that it could not have obtained donations through coercion as alleged by the Revenue as under the admission regulations of AICTE, there were only two defined areas of discretion in the matter of admission viz. 5% of the sanctioned seats for NRls and filling up of ‘lapsed seats’.

The Tribunal found that there was no donation received from outside India. Also as there was no ‘lapsed seat’ which could be filled at the discretion of the assessee no donations could have been collected.

The Tribunal had also noted that while the seats sanctioned by the University was 535, only 500 students were actually admitted leaving 35 of the sanctioned seats vacant. Thus the Tribunal opined that when the assessee was unable to get students to fill up even the sanctioned strength, it could not be be in a position to demand and get donations at the time of admission.

Therefore, the Tribunal had held that the assessee had very little discretion in the matter of admission or charging of’ fees during the year and therefore, the corpus donations received could not be treated as capitation fees and that the surplus earned by the assessee could not be on account of “profiteering” warranting the assessment of assessee’s surplus as ‘income from business’.

In the instant appeal, the Tribunal following the Judicial discipline followed the orders of the Co-ordinate Benches as no strong reasons against it could be shown by the Department.

Accordingly, the Tribunal held that donations received by the assessee could not be considered as capitation fee and generation of surplus did not render it ineligible for claiming exemption u/s 11 and 12 of the Act.

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