TMI Blog2014 (2) TMI 658X X X X Extracts X X X X X X X X Extracts X X X X ..... y for educational purpose and not for the purposes of profit" – Relying upon Additional Commissioner of Income-tax, Gujarat v. Surat Art Silk Cloth Manufacturers Association [1979 (11) TMI 1 - SUPREME Court] – the test that must be applied is not "whether as a matter of fact an activity results in profit" but "whether the activity is carried on with the object of earning profit". According to the revenue the University gets about 1% financial aid/ grants from the Government of the total receipts - even without grants, the surplus amount is more than double the expenditure incurred during 2004-05 till 2009-10. In 2005-06 the surplus amount is almost four times more than the actual expenditure - without actual compliance of a taxing provision, such as Section 10 (23C) (iiiad) of the Act, the provision, such as Section 23 of the 1994 Act, would not entitle any person, such as the University to seek any benefit of the taxing provision. Section 10(23C) (iiiad) of the Act, uses the word/expression 'financed', which is a clear indication of the intendment of the legislature - an exemption under Section 10(23C) (iiiab) cannot be either claimed or granted unless all the ingredients as re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellant - Visveswaraiah Technological University, Belgaum (for short, 'the University') under Section 148 of the Income Tax Act, 1961 (for short, 'the Act'). The notices were issued requiring the University to file its return of income for the assessment years 2004-05 to 2009-10, since, according to the Revenue, income during these years had escaped assessment. Compliance, of these notices was not done, and hence notices under Section 142(1) dated 11.04.2011 and 06.09.2011 were issued. Despite these notices, no returns were filed and hence summons under Section 131 of the Act dated 09.11.2011 were issued fixing the date of hearing on 17.11.2011. Then, the University sought further time to file returns. On 15.12.2011 they filed return of income declaring 'nil income', claiming exemption under Section 10 (23C)(iiiab) of the Act. Assessment for the years 2004-05 to 2009-10 was accordingly completed by separate assessment orders, all dated 29.12.2011, under Section 143(3) read with Section 147 of the I.T. Act, rejecting the claim of the University seeking exemption under Section 10(23C)(iiiab). The Assessing Officer held that the University is not an University "not existing for p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the facts and in the circumstances of case and in law, the authorities below were justified in rejecting the claim of the University seeking exemption/deduction under section 10(23C) (iiiab) of the I.T. Act, based on their case that they are wholly (or at least substantially) financed by the State Government, as contemplated by Section 23 of the Visveswaraiah Technological University Act, 1994? (ii) Whether the University is existing solely for educational purposes and not for purposes of profit and that the surplus in its accounts in any given year would not constitute profit to deny exemption/benefit under section 10 (23C) (iiiab) of the I.T. Act? (iii) Whether the appellant -University, is a State or part of the State, within the meaning of Article 289(1) of the Constitution of India so as to seek exemption from taxation under this Article? 6. Before we consider the questions of law and advert to the arguments advanced by learned counsel for the parties in support of their claims we deem it appropriate to state about status of the University. The University was established and incorporated in the State of Karnataka for development of Engineering, Technology and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its "income" from fees, grants, donations, gifts, if any; (ii) contributions or grants that may be made by the Central Government, State Government, University Grants Commission, All India Council for Technical Education or like authority or any local authority or any corporation owned or controlled by the Government; (iii) other contributions, receipts, grants and donations and benefactions; (iv) contributions from industry, business and technical departments of the Government and other user organisations: Provided that the funds received by the University under item (iv) above shall be called the Development Fund of the University which shall be utilised for the promotion of Technological Education and Research both within the University and in the constituent units without diverting the same for normal capital or recurring expenditure of the University. (2) The University may have such other funds as may be prescribed by the Statutes. (3) The General Fund, the Development Fund and the other funds of the University shall be managed according to the provisions laid down in the Statutes. (4) The Government shall, every year, make non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure. The Act of 1994 also provides for removal of difficulties under Section 55 thereof. 7. It is not in dispute that the receipts and expenditure of the University are audited under the provisions of the Comptroller Auditor General (Duties, Powers Conditions of Service) Act, 1971 (for short, 'the Act of 1971'). Section 14 of the Act of 1971 provides for audit of receipts and expenditure of bodies or authorities substantially financed from the Union or State Revenues. A close look at this provision as well as the provisions contained in Section 23 of the Act of 1994 would show that audit of receipts and expenditure of the University is carried out under the provisions of the Act of 1971, in view of the provisions contained in the Act of 1994, in particular, Section 23 thereof, which contemplate nonlapsable grants by the State Government for all practical purposes. 8. We would also like to make reference to the grant of exemption under Section 80G of the Act, to which our attention was drawn by learned Senior counsel for the University. There is no dispute that the University had submitted application to the Commissioner of Income Tax (Appeals), Belgaum in Form 10G for grant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "10. In Computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included ----------------------------- (23C) any income received by any person on behalf of - ----------------------------- (iiiab) any university or other educational institution existing solely for educational purposes and not for purposes of profit, and which is wholly or substantially financed by the Government; or (iiiad) any university or other educational institution existing solely for educational purposes and not for purposes of profit if the aggregate annual receipts of such university or educational institution do not exceed the amount of annual receipts as may be prescribed; or (vi) any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad) and which may be approved by the prescribed authority; or " 10.1 From bare perusal of sub-clauses (iiiab) (iiiad) and (iv), it is clear that they apply to Universities and other Educational Instituti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t allotted huge track of land for establishment of the University and has been continuously allotting lands either free of cost or at concessional rates for further extension/expansion of the University. About 194 Engineering Colleges are affiliated to this University, and therefore, this University requires a huge establishment/infrastructure to carry out its duties/functions contemplated by the Act of 1994. 11.2 Mr. Nair submitted that the Government gave initial land and funds for creation of assets of the University. The University, thus, acquired the income generation capacity with the help of finances from the Government, and therefore, whatever is the income they are getting from different sources and under different heads will have to be treated as financial aid by the State Government. In other words, the whole finance of the University is the Government finance. It was submitted, merely because fees collected exceed the grants received from the Government would not render it outside the purview being an educational institution existing solely for educational purpose. In support of this contention, Mr. Nair, learned Senior Counsel placed heavy reliance upon the order dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the University and now number of colleges has reached 194. Every year 90,000 students clear the degrees of B.Tech. and M.Tech. Over and above this, every year new colleges are coming up which result in fairly large amount of surplus funds. The surplus funds in this background cannot be treated as profit or income, but it is only a receipt over expenditure as authorised by the Government and cannot be disbursed or distributed among anybody, but could be only used for schemes and projects exclusively for educational purposes as directed and approved by the State Government. He submitted, the stand of the revenue that the University has accumulated surplus over a period of time as its profit from collection of fees is wholly misconceived and cannot hold good so long as the surplus is spent exclusively for education purpose. 11.6 Mr. Nair invited our attention to the provisions of the Act of 1971 to contend that the University is being audited by the Principal Accountant General, Karnataka in terms of section 14(1) thereof. This fact, which has not been denied by the revenue, he submitted, would establish that the appellant is substantially financed by the State Government. 12. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng effect to the provisions of the Act, the State Government may do anything which appears to it to be necessary for the purpose of removing the difficulty. In the light of this provision he submitted that it is well within the power of the Government not to extend any maintenance grant, if the circumstances do not require or demand for the same. Hence, he submitted, reliance on Section 23 is of no avail to the University. 12.4 Mr. Wilson, submitted that the development grant extended for purchase of lands and other infrastructure is for the purpose of investment in capital assets which cannot be treated as annual maintenance grants contemplated under Sub-section (4) of Section 23. He submitted that each assessment year under the Income Tax Act is a separate unit and assessment proceedings in each assessment year is also a separate proceeding. An assessee seeking benefit, deduction or exemption, therefore, has to prove that during the relevant assessment year under consideration, the conditions of the provisions under which the assessee is seeking the benefit have been fulfilled. Failure to do so in any particular assessment year would indicate refusal of benefit of exemption for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, however, great the hardship may appear to the judicial mind to be. On the principle of interpretation of statute the following passage in Commissioner of Sales-tax, U.P. v. Modi Sugar Mills Ltd., AIR 1961 SC 1047 is relevant - "11 In interpreting a taxing statute, equitable considerations are entirely out of place. Nor can taxing statutes be interpreted on any presumptions or assumptions. The court must look squarely at the words of the statute and interpret them. It must interpret a taxing statute in the light of what is clearly expressed: it cannot imply anything which is not expressed; it cannot import provisions in the statutes so as to supply any assumed deficiency." 14.1 The Supreme Court in Mathuram Agrawal v. State of M.P. in (1999) 8 SCC 667 in paragraph 12 observed thus- "12 The intention of the legislature in a taxation statute is to be gathered from the language of the provisions particularly where the language is plain and unambiguous. In a taxing Act it is not possible to assume any intention or governing purpose of the statute more than what is stated in the plain language. It is not the economic results sought to be obtained by making the provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the University could be termed as profit so as to deny them benefit of Section 10 (23C) (iiiab) is the question. It is true that the University has not been established for "making" profit under the provisions of the Act of 1994 by the State Government. But, whether it systematically started making profit, as alleged by the revenue, is the question. In short it is the case of the revenue that the University is existing for the purposes of profit though it was set up for educational purpose and not suppose to make profit. 18. As observed earlier, sub-clauses (iiiab), (iiiad) and (vi) of Sections 10 (23C) use the similar language with the distinguishing factors noticed earlier. The expressions, "existing solely for educational purposes and not for purposes of profit", is common in all the three sub-clauses. Thus the common element in sub-clauses (iiiab), (iiiad) and (vi) is that the University or education institution must exist "solely for educational purpose and not for the purposes of profit". The ambit of this expression can find elucidation on the basis of a judgment of the Supreme Court in Additional Commissioner of Income-tax, Gujarat v. Surat Art Silk Cloth Manufacturers As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ease to exist for net making profit and in that event would not be entitled for exemption under this provision. 21. At this stage we would also like to refer to Section 10(22) of the I.T. Act, which was omitted by Finance (No.2) Act, 1998 with effect from 01.04.1999. By the very same Finance (No.2) Act, 1998 sub-clauses (iiiab), (iiiad) and (v) were introduced. Clause (22) which was omitted from the I.T. Act with effect from 01.04.1999 reads thus: "Any income of an University or other educational institution, existing solely for educational purpose and not for the purpose of profit." 22. It appears that several educational institutions had taken advantage of this provision (10(22)) to seek exemption which now fall within the category under clause (vi) of Section 10(23C) of the I.T. Act. Effect of this amendment was considered by the Supreme Court in paragraph 40 of the judgment in American Hotel and Lodging Association Educational Institute v. Central Board of Direct Taxes and Others, (2008)10 Supreme Court Cases 509, which reads thus- "40. We shall now consider the effect of insertion of provisos to Section 10 (23C) (vi) vide the Finance (No.2) Act, 1998. Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been carried on for long years. Moreover, the fact that a surplus may arise in the activity of the trust after meeting the expenditure incurred for conducting educational activities was held not to disentitle the trust for the benefit of the provisions of Section 10(23C). 24. It is in this backdrop we would now like to consider whether the appellant is "wholly or substantially" financed by the Government of Karnataka and that the University existed during the relevant assessment years 'not for purposes of profit'. While considering these questions we would also like to consider whether the "surplus" in its account during the relevant assessment years would constitute profit so to deny exemption and/or benefit under Section 10(23C) (iiiab) of the I.T. Act. 25. Learned counsel for the appellant submitted that after the University was set up, funds started flowing from different sources, decided by the Government, such as fixed share of common entrance test, registration fee collected by Examination Authority and fixed amounts of fees collected from the students by the affiliated colleges for the purpose of conducting examination and for other purposes. The University, he submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2011-12 Rs.172.34 Crores Rs.78.41 Crores Rs.93.93 Crores -54.50% 26.2 The third table shows fees collected and expenditure incurred by the University for two financial years i.e., 2009-10, 2010-11. Table-III Nature of fees Financial year Amount of Fees Collected Amount expenditure income Balance/profit Convocation 2009-10 Rs.2,72,40,187 Rs.27,07,672 Rs.2,45,32,515 Examination Fee Rs.32,79,37,115 Rs.17,66,43,156 (Remuneration to examiners and others, squad expenses, TA, DA in connection with exam.) Rs.15,12,93,959 Convocation 2010-11 Rs.3,41,31,767 Rs.4,22,595 Rs.3,37,09,173 Examination Fee Rs.34,09,71,278 Rs.12,18,68,114 Rs.4,81,88,886 (Remuneration to examiners and others, squad expenses, TA, DA in connection with exam.) Rs.17,09,14,278 E-learning Rs.12,88,58,695 Rs. Nil Rs.12,88,58,695 26.3 The last table indicates percentage of grant received from the Government as against the receipts as per income and expenditure statement placed on recor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee 10/- 10/- 10/- 10/- Total : 4,290/- 290/- 290/- 290/- Total = 4,290+290+290+290+=5,160 27. There does not appear to be any dispute that every year about 90,000 students from different streams pass out from the colleges and the University issue them degrees. 28. As against the receipts under different heads, reflected in the aforementioned tables, the University, as reflected in the assessment order, received the following grants between 1998-99 and 2009-10: in 1998-99 and 1999-2000 the University received about four crores of rupees for purchase of land and others. In 2000-01 they received Rs.48,93,000/- for development work; in 2001-02 they received Rs.7,50,000/- for development work. In 2002-03 they received Rs.45,00,000/- for development work. In 2003-04 and in 2004-05 they received Rs.10,00,000/- each for development work. In 2005-06 they received Rs.7,50,000/- and Rs.10,00,000/- each for development works from 2006-07 to 2009-10. Thus, since 1998-99 till 2009-10 the total grants/ funds paid/ made available by the State Government to the University were Rs.5,68,93,000/-. 29. From the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State Government, in our opinion, must be rejected. 32. If the grants, which according to the University, it is entitled for under the provisions of Section 23 of the Act of 1994, are added to the receipts as per the income and expenditure account perhaps surplus figures would further enhance by about 20%. Thus, the receipts as per the income and expenditure account, reflected in the Tables would show that they are exorbitantly higher than the actual expenditure and in any case cannot be treated as "incidental surplus". It is also evident from the fact that even after incurring expenditure during all these years the University has at its disposal about 500 crores rupees as surplus. 33. We make it clear that we are not expressing any opinion on the question whether the University should collect such huge sums from students under different heads. But the fact remains that the University collect huge sums, 3-4 time more than the requirement. Such "surplus", in our opinion, cannot be stated to be incidental. It is not in dispute that huge amounts are invested by the University in fixed deposits, which fetch huge interest thereon. In this backdrop, it will have to be considered that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and development funds and created assets of the University whereby it acquired income generation capacity would not mean the "income" that the University is generating from other sources will have to be treated as financial aid by the Government. If we say so, perhaps every such institution, which admittedly, make profit, also will have to be exempted under sub-clauses (iiiab) (iiiad) and (vi) of Section 10(23C) of the Act. The provisions contained in Section 10(23C) (iiiab) in our opinion cannot be stretched that far, when admittedly no grants, as contemplated under Section 23 of the Act of 1994, are ever extended by the State Government to the University. Extending actual grants or financial aid is one thing and organizing funds is other. Merely because funds are organized by the Government or generated, as contemplated under sub-sections(1) to (3) of Section 23 of the Act of 1994, would not, in our opinion, mean or could be treated as financial aid by the Government, so as to say that the University is wholly or substantially financed by the Government. 36. The University has placed on record the information received by them under the Right to Information Act from the office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "reasonable surplus" and it would indicates that the University is systematically making profit. As observed earlier and seen from different tables, it cannot be stated that fees collected by the University under different heads, is reasonable surplus and it is incidental. There cannot be any justification to collect the monies under different heads 3-4 times more than what they require to spend for the purpose for which they collect it. For instance, as seen in Table - III, the University in the financial year 2009-10 collected Rs.2,72,40,187 fees for convocation as against which the total expenditure incurred under this head was hardly Rs.27,07,672/-. In 2010-11 under the same head the total collection was Rs.3,41,31,667/-, whereas the total expenditure was hardly Rs.4,22,595/-. i.e. hardly 1/8 of the total collection. Thus, the collection of fees under each head and corresponding expenditure for the services rendered does not justify the claim of the University that the receipts are only in the nature of surplus and not profit. As observed earlier, surplus funds could be collected, or these could be incidental surplus, to meet contingencies or for spending during the subsequent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r charge exorbitantly more than what they need. The "surplus" can be generated for the benefit/use of the institution and not to the extent so as to keep it in fixed deposits to earn huge income by way of interest. 41. In deciding the character of the recipient, it is not necessary to look at the profit each year, but to consider the nature of activities undertaken. The character of the recipient of income must have the character of educational institution in India to be ascertained from the nature of activities. Mr. Nair, therefore, submitted that if after meeting expenditure, surplus remains incidentally from the activity carried on by the educational institution, it will not cease to be one existing solely for educational purpose. In other words, he submitted, the existence of surplus from the activity will not mean absence of educational purpose. In support of this contention he placed reliance upon the judgment of the Supreme Court in American Hotel and Lodging Association Educational Institute (supra). 42. The meaning of the word 'surplus' given in Black's Law Dictionary, Eighth Edition, reads thus- 1. The remainder of a thing; the residue or excess. 2. The excess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be useful. Paragraph 156 reads thus: "While this Court has not laid down any fixed guidelines as regards fee structure, in my opinion, reasonable surplus should ordinarily vary from 6% to 15%, as such surplus would be utilized for expansion of the system and development of education." 45. The Supreme Court in P.A. Inamdar and others v. State of Maharashtra and Others, (2005) 6 SCC 537 observed that, education, accepted as an useful activity, whether for charity or for profit, is an occupation. Nevertheless, it does not cease to be a service to society and even though an occupation, it cannot be equated to a trade or business. In Mohini Jain (Miss) v. State of Karnataka and Others, (1992) 3 SCC 666, the Supreme Court in paragraph 17 observed that, "the students are given admission to the educational institutions - whether state-owned or state-recognised - in recognition of their "right to education" under the Constitution. Charging capitation fee in consideration of admission to educational institutions, is a patent denial of a citizen's right to education under the Constitution. The Supreme Court further observed that Indian civilisation recognises education as one of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied on by the educational institution, the institution would not cease to be one which is existing solely for educational purposes since the object is not to make profit. Thus, after meeting expenditure, a surplus results incidentally from an activity lawfully carried on by the educational institution, the institution will not cease to be one existing solely for educational purposes and since the object is not to make profit. The decisive or acid test, the Supreme Court observed in Aditanar (supra), is whether on a overall view of the matter, the object is to make profit. In evaluating or appraising the issue, the Supreme Court noted that one should bear in mind the distinction between the corpus, the objects and the powers of concerned authority. In short, merely because 'certain surplus' arises from its operations, it cannot be held that the institution is being run for the purpose of profit so long as no person or individual is entitled to any portion of the said profit and the said profit is used to meet the object of institution. 49. It is not in dispute that the University was established for educational purpose and not for purposes of profit. But that by itself, in our opi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty giving any relief or benefit to the students in terms of monies. This being the position, it cannot be stated that though the University was set up for educational purpose, it is no more a profiteering institution. In other words, it is undoubtedly making profits which cannot be exempted under the provisions of Section 10(23C) (iiiab) of the I.T. Act. The fact that the University has unreasonable surplus of income over the expenditure during the years in question, it cannot, by any stretch of imagination, would lead to the conclusion that it exists not for the purposes of profit, though the predominant nature of the activity is educational. 52. It was argued on behalf of the University that considering the actual grants received by the University from the State Government in the form of monies and the lands coupled with the statutory obligation under the provisions of the Act of 1994 it is clear that the University, though not wholly, is substantially financed by the State Government. It was submitted by Mr. Nair, learned Senior counsel for the University that the very approach of the revenue comparing the grants actually received with the receipts under different heads for de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dy corporate' having a perpetual succession and a common seal with a power to acquire and hold property and to enter into contracts in the name by which it is known, sue and be sued and having its own general fund cannot be treated as a 'State' under Article 289(1) of the Constitution of India nor 'a person' as defined under Section 2(31) of the I.T. Act. 56. The definition, as reflected in Article 12 of the Constitution of India, in our opinion cannot be applied to bring the University within the ambit of Article 289 of the Constitution of India. In other words, the extended definition of State as contemplated by Article 12 of the Constitution cannot be extended to bring the University within the ambit of Article 289(1) of the Constitution of India. In this connection, we would like to refer to judgments of the Supreme Court. The Supreme Court in The Andhra Pradesh State Road Transport Corporation by its Chief Executive Officer, Hyderabad, v. The Income-tax Officer, B1B - Ward, Hyderabad and another, AIR 1964 SC 1486, observed that the scheme of Article 289 appears to be that ordinarily the income derived by a State both from Governmental and Non-Governmental or commercial activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atutory corporation is not a 'State' within the meaning of said provision. 59. The Supreme Court in Adityapur Industrial Area Development Authority v. Union of India and Others, (2006) 5 SCC 100, while dealing with Article 289(1), in paragraphs 10 and 11 observed thus: "10. A mere perusal of Article 289(1) discloses that a claim of exemption under it must proceed on the foundation that the exemption is claimed in respect of property and income of a State. Once it is held that the property and income is that of the State, a question may well arise whether it is still taxable in view of the provision of clause (2) of Article 289 which dominantly is in the nature of a proviso. Clause (2) empowers the Union to impose any tax to such extent as Parliament may by law provide, in respect of a trade or business of any kind carried on by, or on behalf of, the Government of a State, or any operation connected therewith. Thus, even the income of the State within the meaning of clause (1) of Article 289 may be taxed by law made by Parliament, if such income is derived from a trade or business of any kind carried on by or on behalf of the Government of a State or any operations connect ..... X X X X Extracts X X X X X X X X Extracts X X X X
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