Exemption 10(23C)(iiiab)-Fee collection by Universities not Government funding because it is authorized under Act or fees rates fixed by Govt. Agencies-SC

Supreme Court in a latest judgment has held that Fees collection by Universities does not amount to Government funding for exemption u/s 10(23c)(iiiab) merely because such fees are authorized under the relevant Act or fees rates are fixed by Govt. authorised Agencies

Case Law Details:
Civil Appeal No. 4361-4366 of 2016
Visvesvaraya Technological University (Appellant) vs. Assistant Commissioner of Income Tax (Respondent)
Date of Judgment: 22/04/2016
Coram: Justice Ranjan Gogoi and Justice Prafulla C. Pant

Important Case Laws referred:
Queen’s Educational Society vs. Commissioner of Income Tax (2015) 8 SCC 47
CIT vs. Surat Art Silk Cloth Manufacturers’ Assn  (1980) 2 SCC 31
American Hotel and Lodging Association Educational Institute vs. CBDT and Ors (2008)10 SCC 509
Islamic Academy of Education and another vs. State of Karnataka and others (2003) 6 SCC 697
Mother Diary Fruit & Vegetable Private Limited vs. Hatim Ali & Anr [(2015) 217 DLT 470]
Commissioner of Income-tax, Bangalore vs. Indian Institute of Management (2014) 49 Taxmann.com 136 (Karnataka)

Brief Facts of the Case:
The appellant University (VTU) Karnataka was constituted under the Visveswaraiah Technological University Act, 1994 (VTU Act). It discharged all functions earlier performed by the Department of Technical Education, The University exercises control over all Government and Private Engineering Colleges within the State of Karnataka. For Assessment Years 2004-2005 to 2009-2010 in response to notice u/s 148, returns of income were filed by the appellant declaring ‘Nil’ income claiming exemption u/s 10(23C)(iiiab) of the Income Tax Act, 1961. However, the claim of exemption was not accepted by the Assessing Officer.  The appellant agitated the matter before all appellate authorities up to the High Court but claim of exemption was denied.

As per section 10(23C)(iiiab), the entitlement is subject to twofold conditions.
(a) The educational institution/university must be existing solely for the purpose of education and without any profit motive and;
(b) The educational institution/university must be wholly or substantially financed by the government.

The institution/university must exist solely for the purpose of education and not for profit

The important facts as observed by their Lordships were as under:

  1. during a short period the University had generated a surplus of about Rs.500 crores.
  2. There was a significant difference between the fees collected and the actual expenditure incurred.
  3. No remission, rebate or concession of fees charged had been granted to the students.
  4. The surplus generated was far in excess of permissible limit of 6 to 15% as laid down by the Court.
  5. The amount of direct grant from the Government was negligible.
  6. The number of private engineering colleges affiliated to it had increased three times.
  7. University had spent and intends to further spent huge amounts on infrastructure.
  8. Even in the absence of government grants, the University has paid salaries and prospered.
  9. Surplus accumulated over the years had been ploughed back for educational purposes.

The Court also noted its views in the case of Queen’s Educational Society wherein it summarised the law common to Section 10(23C)(iiiad) and (vi) as under:

(1) Where an educational institution carries on the activity of education primarily for educating persons, the fact that it makes a surplus does not lead to the conclusion that it ceases to exist solely for educational purposes and becomes an institution for the purpose of making profit.
(2) The predominant object test must be applied – the purpose of education should not be submerged by a profit making motive.
(3) A distinction must be drawn between the making of a surplus and an institution being carried on “for profit”. No inference arises that merely because imparting education results in making a profit, it becomes an activity for profit.
(4) If after meeting expenditure, a surplus arises incidentally from the activity carried on by the educational institution, it will not be cease to be one existing solely for educational purposes.
(5) The ultimate test is whether on an overall view of the matter in the concerned assessment year the object is to make profit as opposed to educating persons.”

In particular, the Apex Court relied on the paragraph 19 of the judgment wherein it was held that;

“The final conclusion that if a surplus is made by an educational society and ploughed back to construct its own premises would fall out of Section 10(23-C) is to ignore the language of the section and to ignore the tests laid down in Surat Art Silk Cloth case [CIT v. Surat Art Silk Cloth Manufacturers’ Assn.(1980) 2 SCC 31], Aditanar case [Aditanar Educational Institution v. CIT [(1997) 3 SCC 346] and American Hotel & Lodging case [American Hotel & Lodging Assn. Educational Institute v. CBDT [(2008) 10 SCC 509]. It is clear that when a surplus is ploughed back for educational purposes, the educational institution exists solely for educational purposes and not for purposes of profit.”

In view of the above observations the Apex Court held that the first requirement of Section 10(23C) (iiiab), namely, that the appellant University exists “solely for educational purposes and not for purposes of profit” was satisfied.

The institution/university must be wholly or substantially financed by the government.

The Apex Court observed that Government grants/direct financing by the Government during the six Assessment Years in question was a meager of 1% of total receipts of the University. The appellant contended that fees collected under the provisions of Section 23 of the VTU Act must be taken to be receipts from sources of finance provided by the Government. The rates of such fees were fixed by the Fee Committee of the University or by authorized Government Agencies Therefore, such receipts must be considered as funds made available by the Government as contemplated under Section 10(23c)(iiiab).

The Apex Court observed that under the Income Tax Act, 1961, while Section 10(23c)(iiiab) deals with Government Universities, Section 10(23c)(iiiad) deals with small Universities based on annual turnover  criteria and similarly section Section 10(23c)(vi) takes care of Private Universities with gross receipts exceeds Rupees One Crore.

Regarding the contention of the appellant, the Court observed that if fee collection is to be understood to be amounting to Government funding only because it is empowered by the Statute, all receipts in the nature of fees may become eligible to claim exemption u/s 10(23c) (iiiab) which would render the provisions of the other two Sub-sections of no value.

The Court observed that:

  1. the funds received from the Government contemplated under Section 10(23c)(iiiab) must be direct grants/contributions.
  2. the expression “wholly or substantially financed by the Government’ as appearing in Section 10(23C) cannot be confined to annual grants and must include the value of the land made available by the Government.
  3. even if the value of the land allotted to the University was taken into account the total funding was not more than 4% – 5% of its total receipt.
  4. that exemption under Section 10(23c)(iiiab) for a particular assessment year is to be judged in whole and not in the context of receipt of annual grants from the Government in that particular year
  5. apart from annual grants, the value of the land made available; the investment by the Government in the buildings and other infrastructure and the expenses incurred in running the institution must all be taken together while deciding whether the institution is wholly or substantially financed by the Government.

In view of the above observations the Apex Court held that the appellant University neither directly nor even substantially financed by the Government and consequently did not satisfy the second requirement of Section 10(23C)(iiiab) of the Act. 

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