TMI Blog2007 (10) TMI 437X X X X Extracts X X X X X X X X Extracts X X X X ..... able activity/educational institution as an apparatus for selling the education, in our opinion, the element of charity no longer remains in the activity of the assessee. Education would remain as a charity only in a case where the education was imparted systematically for a fee prescribed by the Government. In our opinion, it is not the intention of the Parliament to recognize any body/society or institution as a charitable institution where education was a saleable commodity. In the case on hand, the material found during the course of survey operation clearly established the collection of money over and above the fee prescribed by Government for admission of a student. Therefore, it is a clear case of sale of education by the assessee-society. In our opinion as such, the assessee cannot be considered as a charitable institution u/s 2(15) of the Income-tax Act. Therefore, the assessee is not eligible for exemption u/s 11 of the Income-tax Act. If any income was generated in the course of educational activity, the said income shall be construed as if it was generated in the course of carrying on the charitable activity. Therefore, such receipt/income received in the course ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed authority as required u/s 10(23C)( vi) and it also exists for profit and not solely for educational purpose, in our opinion, the assessee is not entitled for exemption u/s 10(23C)( vi) also. Further, we find that the Government and the prescribed authorities require to be informed before passing any order without giving effect to the provisions of section 10 of the Income-tax Act - In view of first proviso to section 143(3), the Assessing Officer may pass an order without giving effect to the provisions of section 10, provided, he informs the prescribed authority/Central Government as the case may be and the approval granted earlier is withdrawn or rescinded. In this case before us, it is not the case of the assessee that any approval was obtained from prescribed authority. In fact, as seen from assessment order, the prescribed authority, rejected the application of the assessee for approval. The question of intimating the prescribed authority and waiting for withdrawal of approval may be necessary in a case where approval was granted earlier. Since no approval was granted by prescribed authority earlier, there is no need for the Assessing Officer to intimate to the prescri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e authorities that he was not aware of the fees collection. The said Srinivasa Rao also stated that he was not aware of the account books of the society. Moreover, he also stated that he does not have any role in the society. In contradiction to what he stated earlier, the said Shri Srinivasa Rao stated before the authorities that he himself wrote some of the incriminating material seized at the time of survey. These incriminating material relates to collection of fees from the students admitted under management quota. Therefore, according to the ld. Counsel there is a clear contradiction in the statement made by Shri Srinivasa Rao. Therefore, an opportunity should be given to the assessee to cross examine Shri Srinivasa Rao, before relying on the same. Since such an opportunity was not given to the assessee by the Assessing Officer. The learned counsel submitted that the matter may be remitted back to the file of the Assessing Officer. 3. The ld. Counsel further submitted that the Assessing Officer has taken the income of only one college for computation at page 11 of the assessment order. The income derived by the assessee from other educational institutions was not consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... available on record. Admittedly, the assessee-society is running educational institutions and hostels in the States of AP and Maharashtra. There was a survey operation in the premises of one of the colleges on 20-7-2005. Several incriminating materials were seized in the course of survey operation which discloses collection of money over and above the prescribed fee from the students. From the assessment order, it appears the assessee initially applied for approval of the prescribed authority for exemption, as provided in section 10( 23 )( c )( vi ) of the Act. The prescribed authority appears to have rejected the claim of the assessee. When this was brought to the notice of the assessee by the Assessing Officer, the assessee claimed that it has the option to choose between two exemptions viz ., section 10( 23C )( vi ) and section 11 of the Act. Therefore, the assessee claimed exemption under section 11 of the Act. However, the Assessing Officer found that such a choice is not available to the assessee. The Assessing Officer further observed that section 11 of the Act does not authorize deduction from total income. It provides for exemption. In other words, the income from prope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order has been passed by DIT (Exemptions) in pursuance of the direction of this Tribunal. The fact remains that the assessee was granted registration with effect from 1-4-2001. 7. Let us examine whether the assessee-society is a charitable institution or not. Charitable purpose has been defined by the Legislature in section 2( 15 ) of the Income-tax Act. Section 2( 15 ) of the Income-tax Act reads as follows : Charitable purpose includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility. From the above, it is obvious that education is included in the charitable purpose. Admittedly, the assessee-society is running educational institutions. The next question that falls for our consideration is when the assessee collects money over and above the fees prescribed by the Government, whether it constitutes a charitable institution or not. We find that the Apex Court in the case of Miss Mohini Jain v. State of Karnataka [1992] 2 SCC 666 considered the issue of capitation fee collected by the private educational institutions. His Lordship Hon ble Mr. Justice Kuldip Singh (as His Lordship then was), speaking f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. When the assessee used the charitable activity/educational institution as an apparatus for selling the education, in our opinion, the element of charity no longer remains in the activity of the assessee. In other words, when the assessee sells the seat of a professional course and collects capitation fee, the activity of assessee cannot remain a charitable activity, within the meaning of section 2( 15 ) of the Income-tax Act. Education would remain as a charity only in a case where the education was imparted systematically for a fee prescribed by the Government. In our opinion, it is not the intention of the Parliament to recognize any body/society or institution as a charitable institution where education was a saleable commodity. In the case on hand, the material found during the course of survey operation clearly established the collection of money over and above the fee prescribed by Government for admission of a student. Therefore, it is a clear case of sale of education by the assessee-society. In our opinion as such, the assessee cannot be considered as a charitable institution under section 2( 15 ) of the Income-tax Act. Therefore, the assessee is not eligible for exem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d or set apart is not in excess of fifteen per cent of the income from such property; ( b )income derived from property held under trust in part only for such purposes, the trust having been created before the commencement of this Act, to the extent to which such income is applied to such purposes in India; and, where any such income is finally set apart for application to such purposes in India, to the extent to which the income so set apart is not in excess of fifteen per cent of the income from such property; ( c )income derived from property held under trust ( i )created on or after 1-4-1952, for a charitable purpose which tends to promote international welfare in which India is interested, to the extent to which such income is applied to such purposes outside India, and ( ii )for charitable or religious purposes, created before 1-4-1952, to the extent to which such income is applied to such purposes outside India : Provided that the Board, by general or special order, has directed in either case that it shall not be included in the total income of the person in receipt of such income; ( d )income in the form of voluntary contributions made with a spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on charitable activity by establishing educational institutions. Therefore, the charitable activity of the assessee is education. The income if any derived from the property held under the Trust and applied for the educational activity, shall be construed as application of income for the purpose of charitable purpose. Therefore, the expenditure incurred in establishing the educational institution namely acquisition of land, construction of building etc., are all application of income for charitable activity. If any income was generated in the course of educational activity, the said income shall be construed as if it was generated in the course of carrying on the charitable activity. Therefore, such receipt/income received in the course of carrying on charitable activity is also eligible for exemption provided the same was applied or set apart for educational purposes. However, such receipt/income cannot be construed as derived from property/business held under trust. Since such receipt/income is inevitable or consequential while carrying on the activity of education, such income also becomes eligible for exemption. The educational institution is an apparatus for carrying out the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a trust or institution than was the scope of sub-section (4A) as originally enacted. In fact, it seems to us that the substituted sub-section (4A) gives a trust or institution a greater benefit than was given by section 13(1)( bb ). If the object of Parliament was to give trusts and institutions no more benefit than that given by section 13(1)( bb ), the language of section 13(1)( bb ) would have been employed in the substituted sub-section (4A). As it stands, all that it requires for the business income of a trust or institution to be exempt is that the business should be incidental to the attainment of objectives of the trust or institution. A business whose income is utilized by the trust or the institution for the purposes of achieving the objectives of the trust or the institution is, surely, a business which is incidental to the attainment of the objectives of the trust. It is clear from the above observation of the Apex Court that if the business income was derived from business held under the trust and the same was utilized by the institution for achieving the object of the institution, then, we may say that such income was applied for charitable purpose. As we already ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tudents under the Management Quota. The material found during the course of survey operation, further establishes that the money collected over and above the prescribed fee for admitting students was paid to the Chairman and other interested persons of the society. Therefore, there is a clear violation of the provisions of section 13(1)( c ) of the Income-tax Act. Under section 13(1)( c ) if any part of income of the institution, is used or applied directly/indirectly for the benefit of a person, i.e., the founder or any interested person, as referred to in section 13(3) of the Income-tax Act, then the assessee shall not be entitled to exemption under sections 11 and 12 of the Income-tax Act. Therefore, in our opinion, the assessee is not entitled for exemption under section 11 of the Income-tax Act. 15. Now, let us examine whether the assessee is entitled for exemption under section 10( 23C )( iii ab ), 10( 23C )( iii ad ) or 10( 23C )( vi ) of the Income-tax Act, 1961. Section 10( 23 )( iii ab ) refers to educational institution or university, which is wholly or substantially financed by Government. In this case, the assessee-society, was not financed by the Government ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tution as specified in section 10( 22 ) of the Act. The object of the society is to establish, run, manage or assist colleges or schools or other educational institutions solely for educational purposes and in that regard to raise or collect funds, donations, gifts etc., colleges and schools are the media through which the assessee imparts education and effectuates its objects. In substance and reality, the sole purpose for which the assessee has come into existence is to impart education at the levels of colleges and schools and so, such an educational society should be regarded as an educational institution coming within section 10( 22 ) of the Act. We hold accordingly. Therefore, it is obvious that the assessee-society would fall within the term other educational institution . 17. Let us now examine whether the provisions of section 10(23C)( vi ) would be applicable to the assessee or not. For the purpose of claiming exemption under section 10(23C)( vi ), the university or the other educational institution, has to get the approval of the prescribed authority. The prescribed authority, is the Chief Commissioner or the Director General of Income-tax. The purpose of de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly shows that the assessee-society collected money over and above the fees prescribed by the Government for admitting the students under the management quota. With this background, we have to examine whether the collection of the money over and above the fees prescribed by Government from the students or their parents for admitting under the management quota would have any profit motive or not. 19. Under article 41 of the Constitution of India, it is the responsibility of the State to provide education to all citizens of this country. The State may discharge its obligation through State owned or State recognized educational institutions. When State/Central Government grants recognition to the private educational institutions, it creates an agency to fulfil its obligation under the Constitution. Therefore, the private institutions, are functioning as agents of the State/Central Government. It is the primary responsibility and obligation of the State to provide education to the citizens. Therefore, the educational institutions while acting as agents of the State have to collect the fees as prescribed by the Government. The students are given admission to the private educational ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is made as an offence punishable in this country. In spite of that, the assessee was bold enough in collecting the money over and above the fees prescribed by the Government. 20. The Apex Court in the case of T.M.A. Pai Foundation v. State of Karnataka [2002] 8 SCC 481 had an occasion to consider the right of the aided and unaided private educational institutions. The Constitutional Bench of the Supreme Court elaborately considered the right of establishing private educational institutions and found that collection of capitation fees being the worst part of mal-administration, can properly be subject-matter of regulatory control of a State. The Apex Court further observed that receiving donations by educational institutions connected with admission of students has to be treated as collection of capitation fees. The Apex Court observed that the right to admit students being an essential facet of the right to administer educational institutions of their choice, the State Government/University may not be entitled to interfere with their right so long as the admission to the unaided educational institution is on a transparent basis and merit is adequately taken care of. It wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mphasized that as per the majority judgment imparting of education is essentially charitable in nature. Thus the surplus/profit that can be generated must be only for the benefit/use of that educdtional institution. Profits/surplus cannot be diverted for any other use or purpose and cannot be used for personal gain or for any other business or enterprise. As, at present, there are statutes/regulations which govern the fixation of fees and as this Court has not yet considered the validity of those statutes/regulations, we direct that in order to give effect to the judgment in TMA Pai case the respective State Governments/concerned authority shall set up, in each State, a committee headed by a retired High Court Judge who shall be nominated by the Chief Justice of that State. The other member, who shall be nominated by the Judge, should be a Chartered Accountant of repute. A representative of the Medical Council of India (in short MCI ) or the All India Council for Technical Education (in short AICTE ), depending on the type of institution, shall also be a member. The Secretary of the State Government in charge of Medical Education or Technical Education, as the case may be, shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fees in advance, only the fees of that semester/year can be used by the institution. The balance fees must be kept invested in fixed deposits in a nationalized bank. As and when fees fall due for a semester/year only the fees falling due for that semester/year can be withdrawn by the institution. The rest must continue to remain deposited till such time that they fall due. At the end of the course the interest earned on these deposits must be paid to the student from whom the fees were collected in advance. From the above observation of the Apex Court, it is obvious that each institute has to collect fees with regard to infrastructure and the benefit of the students of that educational institution. However, that fee has to be fixed by the committee headed by an Hon ble retired High Court Judge. In the State of Andhra Pradesh, a committee has already been constituted to determine the fees that may be collected by the private professional educational institutions. The committee also after considering the information furnished by the respective educational institutions fixed the fees that may be collected by the professional educational institution per semester/year. Therefore, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tution for imparting knowledge to students is an occupation, protected by article 19(1)( g ) and additionally by article 26( a ), if there is no element of profit generation. As of now, imparting education has come to be a means of livelihood for some professionals and a mission in life for some altruists. Therefore, establishing and administering an educational institution for imparting knowledge to students is an occupation, protected by article 19(1)( g ) and article 26( a ) provided there is no element of profit generation. In the case before us, the material found during the course of survey operation clearly establishes the existence of element of profit generation. 22. At page 605 of SCC, the Apex Court further observed as follows : 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 as can be no profiteering and no capitation fee can be charged directly or indirectly, or in any form (paras 56 to 58 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions of section 10 of the Income-tax Act. We have also gone through the provisions of section 143 of the Income-tax Act. The provisions of section 143(3) reads as follows : [(3) On the day specified in the notice, ( i )issued under clause ( i ) of sub-section (2), or as soon afterwards as may be, after hearing such evidence and after taking into account such particulars as the assessee may produce, the Assessing Officer shall, by an order in writing, allow or reject the claim or claims specified in such notice and make an assessment determining the total income or loss accordingly, and determine the sum payable by the assessee on the basis of such assessment; ( ii )issued under clause ( ii ) of sub-section (2), or as soon afterwards as may be, after hearing such evidence as the assessee may produce and such other evidence as the Assessing Officer may require on specified points, and after taking into account all relevant material which he has gathered, the Assessing Officer shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by him or refund of any amount due to him on the basis of such assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay, after giving a reasonable opportunity of showing cause against the proposed withdrawal to the concerned university, college or other institution, recommended to the Central Government to withdraw the approval and that Government may by order, withdraw the approval and forward a copy of the order to the concerned university, college or other institution and the Assessing Officer.] 24. In view of first proviso to section 143(3), the Assessing Officer may pass an order without giving effect to the provisions of section 10, provided, he informs the prescribed authority/Central Government as the case may be and the approval granted earlier is withdrawn or rescinded. In this case before us, it is not the case of the assessee that any approval was obtained from prescribed authority. In fact, as seen from assessment order, the prescribed authority, rejected the application of the assessee for approval. The question of intimating the prescribed authority and waiting for withdrawal of approval may be necessary in a case where approval was granted earlier. Since no approval was granted by prescribed authority earlier, there is no need for the Assessing Officer to intimate to the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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